A reciprocal insurance exchange, or reciprocal, is a unique not-for-profit insurance structure where members, called Subscribers, collectively assume each other’s risk.
Unlike traditional commercial insurance, a reciprocal is owned by its members who contribute to a shared pool to cover each other’s claims.
When a Subscriber joins a reciprocal, they sign an agreement to fund potential losses within the group.
This approach allows members to act both as insureds and as insurers, receiving financial protection without the additional profit-driven costs typical of commercial insurers.
How does a reciprocal insurance exchange operate?
When an insurance claim is submitted, the funds to cover the loss from the claim come from the collective contributions of Subscribers rather than a profit-oriented insurance company.
Members pay into the reciprocal according to the group’s needs and may benefit from dividends or refunds if the claims experience is better than expected.
These surpluses can either be distributed to members or retained to strengthen the fund for future claims.
This flexibility often makes reciprocals an attractive choice for groups seeking customized insurance options without additional premium loadings aimed at generating shareholder profits.
Role of the Attorney-In-Fact (AIF)
A reciprocal insurance exchange is managed by an Attorney-In-Fact (AIF). The AIF oversees day-to-day operations, including claims management, underwriting and general administration.
The AIF may be an individual employed by the reciprocal or a contracted third party.
An advisory committee of elected policyholders works closely with the AIF to ensure decisions reflect the best interests of the members. This governance structure allows members to influence the direction of the reciprocal and maintain control over its administration.
Benefits of a reciprocal insurance exchange
Reciprocal insurance exchanges have several key benefits compared to traditional insurance.
Cost savings and flexibility
They typically require lower capital to get started. Since they don’t focus on generating profits, they can offer competitive premiums.
Subscribers also have greater control over policy coverage, claims processes, and operating costs, allowing the group to address specific needs that may be excluded by commercial insurers.
Tailored coverage
Reciprocals often cater to industry-specific needs. For example, a reciprocal created by a group of manufacturing companies might offer coverage uniquely suited to the sector’s risks, which may be unavailable through standard insurers.
This customization ensures that members are adequately protected in ways that align with their operational realities.
Potential Challenges of a Reciprocal Insurance Exchange
Although reciprocals offer flexibility and control, they require a committed group to initiate and maintain.
A reciprocal can only succeed if it has a large enough pool of members to effectively spread risk.
Smaller reciprocals may face higher operational costs, which can lead to increased premiums.
A successful reciprocal also requires members who are willing to pool their risks and work collectively to manage the organization – which is why many reciprocals are industry-specific.
Is a reciprocal insurance exchange right for you?
Reciprocal insurance exchanges can be an ideal setup for groups or associations seeking customized coverage without the high costs of traditional insurance.
Axxima, an insurance consulting firm, offers expertise in setting up and managing reciprocals, from initial formation to daily operations.
For groups interested in exploring this insurance model, Axxima can provide the support needed in building a reciprocal that meets specific risk management needs.
Contact Axxima if you’re interested in learning more about the flexible, community-driven coverage a reciprocal can provide.
