Reciprocal Insurance Exchanges: What to Know

What is a reciprocal insurance exchange?

Reciprocal insurance exchange refers to one of the many possible business structures in which insurance organizations can operate. A reciprocal exchange model is not commonly used, but some insurance companies employ the approach in property and casualty insurance.

Read on to explore how reciprocal insurance exchanges work, which insurance companies are structured this way, and evaluate some other types of business models employed in the insurance industry.

Reciprocal insurance exchange definition

In a reciprocal insurance exchange — or reciprocal inter-insurance exchange — the company is owned by its policyholders but managed by a separate entity called an attorney-in-fact (AIF), who has power of attorney for the company.

Reciprocal insurers are unincorporated groups of people that agree to insure each other’s losses under contract. Policyholders are called subscribers, and each one owns a part of the company by purchasing a policy. This model is reciprocal because if any subscriber suffers a covered loss, each subscriber policy is assessed an equal amount to pay the claim.

The benefit to reciprocal insurance exchanges is that when there are few losses, all members benefit by sharing in underwriting profits and earning dividends. 

How reciprocal insurance exchanges work

Reciprocal insurance is essentially an exchange of insurance contracts between policyholders. When you sign up for a policy, you will be asked to contribute a surplus or premium deposit in order to help provide a financial cushion for the existing policyholders. Your insurance policy represents your ownership of the company and a subscribers' agreement to comply with the other members of the insurance provider.

Sometimes referred to as a peer-to-peer (P2P) model, reciprocal exchanges are unincorporated associations, meaning that they do not go through the legal process to become companies. Subscribers insure one another while also reaping the benefits of a profitable year together. As a subscriber, you also get a voice in what the company does, ensuring that the company and customers’ interests are aligned. 

Just like any other insurance provider, reciprocal insurance exchanges must follow insurance laws set by the state in which they write policies. Operations like administration, underwriting, sales promotion, and claims management are handled by the attorney-in-fact, who is often overseen by the subscribers' advisory committee. 

Other insurance business models

In addition to a reciprocal exchange model, there are several other ways an insurance company can be structured. Stock insurers and mutual insurers are the most popular among insurance companies in the United States, particularly in property and casualty insurance. Other insurance types may use less common business methods such as fraternal benefit societies, Lloyd’s associations or self-insurance. 

Stock insurers

As public corporations, stock insurers are formed as a corporation, owned by stockholders and run by a board of directors. The objective of stock insurers is to make money for the stockholders of the company— these types of insurers do not share their profits or potential losses with policyholders. Profits are distributed to stockholders as dividends, but these are not guaranteed as profits are never a sure thing. If stockholders are issued dividends, they are taxable. 

Popular stock insurance companies: Allstate, MetLife, and Prudential

Mutual insurers

Similar to reciprocal insurance exchanges, mutual insurers are also owned by the policyholders. They do not have stocks or stockholders, but they are also run by a board of directors who oversee the business operations of the company. This model offers dividends to policyholders if there is a surplus after handling claims and operating expenses. These are considered a refund of overpaid premium and are in turn, not taxable. 

Popular mutual insurance companies: American Family, Amica, State Farm, and Liberty Mutual

Is a reciprocal insurance exchange right for you?

As with every insurance decision you make, it’s important to consider your unique needs for coverage, costs and benefits. Different insurance companies can fulfill different needs, so research mutual, stock, and reciprocal insurers before deciding on a model.

When comparing each insurance type, consider each company’s reason for providing insurance. In a reciprocal insurance exchange, the policyholders are also the insurers, insuring others in order to receive protection and not profits for themselves. Stock insurance companies provide coverage to policyholders in order to make a profit. The quality of your insurance coverage may not directly depend on the type of insurer, but each type offers different premiums in accordance with their specific model. 

As discussed above in the benefits section, reciprocal insurance exchanges have benefits. However, no business structure is perfect and there are potential cons to reciprocal insurance. Newer companies can face setbacks due to a lower number of subscribers. Having more subscribers spreads risk more broadly, and younger companies may not yet have the numbers to support their subscribers’ needs at a low price. Also, monies from reciprocal insurance companies cover the costs of insuring policyholders, operating costs and fees from attorneys-in-fact. Reciprocal insurers must have enough subscribers to cover these costs and potentially pay out dividends. 

It may be a safer bet to choose a long-standing reciprocal insurance company that has existed for long enough to be as reliable as any other form of insurance company. Look into each insurance company's A.M. Best ratings to determine their financial strength and ability to pay out claims.