What Is a Reciprocal Insurance Exchange?
- A reciprocal insurance exchange is an insurer whose policyholders, called subscribers, collectively insure one another by exchanging insurance contracts.
- An attorney-in-fact manages the exchange’s day-to-day insurance operations on behalf of subscribers.
- Reciprocal insurance exchanges may return excess funds to subscribers when finances are strong.
- Although not as common, some exchanges can charge subscribers additional money if funds fall short. This is called an assessable policy.
What is a reciprocal insurance exchange?
A reciprocal insurance exchange is an insurance organization in which policyholders, known as subscribers, collectively insure one another by exchanging insurance contracts. Subscribers contribute premiums to a common pool used to pay covered claims and other expenses.
From a consumer standpoint, having insurance through a reciprocal exchange generally isn’t much different from working with another type of insurance company. Subscribers don’t directly exchange insurance contracts or interact with one another. Instead, an attorney-in-fact (AIF) manages the exchange on their behalf.
How does a reciprocal insurance exchange work?
Like other insurers, a reciprocal insurance exchange pools risk. Subscribers pay premiums, and the exchange uses those pooled funds to pay covered claims and operating costs.
Reciprocal insurance differs in its legal and organizational structure. Subscribers participate in the exchange while the AIF handles operations and contract exchanges.
If the exchange performs well financially, subscribers can receive unused premiums, savings or credits, depending on the exchange and the applicable law. However, if subscribers have assessable policies, they may need to pay an extra charge if the company has a financial shortfall.
An assessable policy allows the exchange to charge subscribers additional money beyond their regular premiums if it doesn’t have enough funds to meet its obligations. Many policies from reciprocal insurance exchanges are nonassessable.
Always understand the state laws governing reciprocal exchanges before participating. Here’s how it works, generally speaking:
- People or businesses join the exchange and buy insurance policies. Once they become subscribers, individuals or businesses can purchase insurance policies.
- Premiums are pooled to pay claims and operating expenses. The exchange uses the money paid by subscribers to cover claims and operating expenses.
- The attorney-in-fact manages the exchange on the subscribers’ behalf. The AIF handles operations on the subscribers’ behalf, including paying out claims.
You may encounter a reciprocal insurance exchange while comparing rates, but the difference might not be obvious — getting coverage and filing claims works much the same as other insurers. If you’re working with a reciprocal insurance exchange, always ask whether the policy is assessable or if extra costs like surplus contributions are charged on top of premiums.
Examples of reciprocal insurance exchanges
Reciprocal insurance exchanges often serve defined groups of people. USAA, for example, requires you to have an eligible military connection to join. Reciprocal insurance can also be more common in areas that have unique insurance needs. For instance, many Florida homeowners companies are reciprocal.
Some examples of reciprocal insurance exchanges include:
- USAA: Organized as a reciprocal interinsurance exchange under Texas law and serving eligible members, associates and their families.
- Farmers: Farmers Insurance Exchange is one of three policyholder-owned interinsurance exchanges operating under the Farmers brand.
- PURE: Privilege Underwriters Reciprocal Exchange is a member-owned reciprocal insurer focused on high-value homes.
- Kin: Kin manages multiple reciprocal exchanges, including Kin Interinsurance Network, which serves Florida.
- Tower Hill: Another reciprocal insurer in Florida, Tower Hill Insurance Exchange is member-owned and offers a share in underwriting profits.
- Loggerhead Insurance: Offers part-ownership in the carrier and focuses on Florida.
Pros and cons of a reciprocal insurance exchange
The reciprocal structure can offer advantages to subscribers, but it also creates considerations that don’t apply to other types of insurers.
Pros
- Subscribers collectively own the exchange
- Subscribers may receive distributions of unused premiums, savings or credits
- Some exchanges focus on a particular group of customers or types of risk
Cons
- The attorney-in-fact manages the exchange but also gets paid for its services, creating a potential conflict of interest
- Assessable policies may require additional contributions after a shortfall
- Organizational structure can be more complex for consumers to understand
Reciprocal insurance exchange vs. mutual insurer vs. stock insurer
A reciprocal exchange is owned by subscribers who collectively insure each other and allows an AIF to handle operations.
Mutual insurance companies, on the other hand, are owned by policyholders, but a corporate structure typically manages day-to-day operations. A stock insurance company is owned by shareholders and managed by a corporate structure. Shareholders don’t have to be policyholders.
None of these insurance structures is automatically better than the others. When comparing insurance companies and coverage, focus on factors such as price, coverage and financial strength rather than organizational structure alone. The table below offers a useful reference for understanding organizational structures.
| Insurance structure | How it’s structured | Who manages it? | Company examples |
|---|---|---|---|
| Reciprocal exchange | Policyholders, called subscribers, collectively insure one another | An attorney-in-fact | USAA, Farmers |
| Mutual insurance company | Policyholders own the company | Management and a board of directors | Amica, State Farm |
| Stock insurance company | Shareholders own the company | Management and a board of directors | Allstate, Geico |
Should you buy insurance from a reciprocal exchange?
A reciprocal exchange can be a reasonable choice if the insurer offers the coverage you need at a competitive price. The company’s organizational structure shouldn’t be the deciding factor.
Compare several features when shopping, whether for homeowners or car insurance:
-
Coverage limits, deductibles
, and exclusions. Look beyond the premium to determine what each policy covers, what it excludes and how much you can expect to pay toward a claim.Your deductible is your share of repair costs when filing a covered claim. Your insurance company pays the rest.
- Premiums and available discounts. Ask about available discounts, including safe driving, bundling and loyalty.
- Eligibility requirements. Some reciprocal exchanges serve specific groups or markets, so you may not qualify for every insurer.
- Customer service and claims experience. Review independent customer satisfaction and complaint data when available.
- Financial-strength ratings. Ratings from agencies like AM Best can show an insurer’s ability to meet its financial obligations.
- Whether the policy is assessable or nonassessable, if applicable. Determine whether you could owe an additional assessment. With an assessable reciprocal policy, your subscriber agreement or policy should describe the potential for paying an additional cost when there’s a financial shortfall.
Frequently asked questions
No. Both are policyholder-owned structures, but a reciprocal exchange is managed by an attorney-in-fact, while a mutual insurance company has corporate management and typically has a board.
The subscribers collectively own a reciprocal insurance exchange. Subscribers are policyholders who participate in the exchange and contribute premiums to its insurance pool.
An assessable policy allows a reciprocal insurer to require an additional contribution from subscribers if funds don’t meet covered losses and expenses. Not all reciprocal insurance exchanges are assessable, but some may instead charge a surplus fee alongside your premium.
Depending on the exchange, its financial results and the applicable state law, subscribers may receive distributions of unused premiums, savings or policy credits.