Managing risk is an important component of life, and insurance is a common way to mitigate many types of risk and loss. Traditional insurance companies are typically organized around two common profit-based business structures. However, there is a third type, called a reciprocal insurance exchange, that offers an alternative organizational structure to individuals. Reciprocal exchanges may be of interest to individuals wanting to participate in a not-for-profit insurance environment focused on the policyholder.
Types of Insurance Companies
The two most common types of privately owned insurance companies are stock and mutual. A stock insurance company builds funds by selling company stock and is owned by its stockholders. Mutual companies are owned by the policyholders, and funds are raised through premiums. A third, less common type of privately owned insurance business is the reciprocal insurance company or exchange, which raises funds through premiums and additional contributions paid by its membership, and is structured through individual indemnity agreements.
The term "reciprocal" indicates a mutual correspondence or a return in kind. Reciprocal insurance exchanges are associations that agree to share risk equally among its members. Members agree to pool risk by acknowledging a reciprocal agreement of indemnity. This agreement makes each member an insurer of and insured by each entity in the reciprocal exchange. In contrast, traditional insurance places the risk upon the insuring company. Reciprocal insurance is also known as inter-insurance.
Reciprocal insurance exchanges are unincorporated entities operating through individual legal agreements. Individual members are referred to as subscribers. Subscribers sign an indemnity agreement and pay premiums into an allocated account. When a subscriber suffers a loss that is outlined in the exchange's agreement, the pooled premiums are used to pay the claim. Each member's liability ends according to the cost of their individual policies. Reciprocal exchanges can house a membership population comprised of any combination of individuals, corporations, partnerships or limited liability companies as outlined in the exchange agreement. These exchanges are not limited to a particular type of insurance or subscriber and may, according to the policies they operate from, offer a wide variety of products including home, auto, renters, recreational and motorcycle policies.
Reciprocal insurance exchanges are managed through an attorney-in-fact. The AIF is hired by the exchange and charged with managing its overall administration, promotion and underwriting. The AIF may be assigned for a specific period of time or in perpetuity and may be an individual or a company. An advisory committee comprised of subscribers oversees the attorney-in-fact and the exchange's operation and finances.
Advantages and Disadvantages
The advantages of a reciprocal insurance arrangement are flexibility and focus upon the policyholder. The exchange is owned by members and controlled by members, and can be structured as desired. A commitment to the policyholder focuses many reciprocal exchanges on the efficient operation of the exchange, which in turn may keep fees and expenses at a minimum. However, all members of a reciprocal exchange accept certain levels of liability according to the subscriber's agreement. In contrast, stock and mutual insurance companies accept this liability for policyholders.
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