A unique alternative to commercial insurance involves the setting up of a ‘reciprocal insurance exchange’ (also known as a reciprocal). Reciprocal insurance is a form of risk transfer which a group of members (normally called “subscribers”) will set up and fund instead of purchasing a traditional insurance policy.

Each subscriber in an exchange assumes part of the risk of the group. When an insurance claim is submitted, the losses are covered by the subscribers as a group.

How a Reciprocal Insurance Exchange Works

A reciprocal insurance exchange is a not-for-profit business structure for an insurance company where subscribing members own that company.

Subscribers enter into a “Subscriber’s Agreement” when becoming a reciprocal insurance exchange member. This Agreement will state that each subscriber must contribute to financing losses of the other subscribers in the same exchange.

This chart provides a simple overview of the difference between traditional insurance and reciprocal insurance exchanges in the event of loss being experienced.

Simply put, in a traditional insurance arrangement, an insured would claim a loss they experience on an insurance policy they have with an insurer. The insurer, who bears the risk, will then pay out the claim pursuant to the terms of the insurance policy. The arrangement is for-profit, with an insurer intending to make a profit through charging premiums to an insured.

Alternatively, in a reciprocal insurance exchange, the insured is instead a ‘subscriber’, who shares risk jointly with other subscribers. Each are owners of the exchange. When one subscriber experiences a loss, every other subscriber who is a member of the exchange will pay out the loss pursuant to the terms of a Subscribers Agreement. These arrangements are not-for-profit and are managed by an ‘Attorney-in-Fact’, who makes decisions for the company.

Benefits of a Reciprocal Insurance Exchange

There are a number of benefits of a reciprocal insurance exchange compared with a conventional insurance arrangement.

Low start-up costs

A key benefit to starting a reciprocal exchange arrangement is there is only a small amount of capital required to get started.

While there are logistical difficulties to starting a company with people who can commit (as is the case with any company), it is not expensive to start a reciprocal company. There are organizational costs, and also a payment to an Attorney in Fact. But these costs are minimal.

No profit margins

The sole objective of a reciprocal is to pool risk. It is not like a conventional insurance company, which has the goal to generate profits for their shareholders.

There is no expectation of profits when premiums are charged to subscribers.

Control over claims

Subscribers of a reciprocal exchange have control over the coverage offered, claims process, and operating costs. This is a considerable benefit compared to regular insurance companies, which typically do not cover some less profitable or riskier coverages. 

By contrast, subscribers can jointly choose the limits and coverage offered in their insurance contracts. Subscribers can receive insurance specific to their sector – it can even offer a type of insurance not offered anywhere else.

Control over reciprocal exchanges

The Attorney in Fact runs the exchange with an Advisory committee that is elected. If subscribers do not like the way things are being run, they can elect a new advisory board.

Many reciprocals are industry-specific. Advisory boards therefore typically consist of people who understand the needs of the business and industry context.

Access to Reinsurance

Reciprocals can limit their exposure by purchasing reinsurance protection for all subscribers.

By doing this, the reciprocal is usually able to offer reinsurance protection against large catastrophic losses (for example, major damage caused by a natural disaster). Without reinsurance, this would not normally be covered.

Interested in learning more about reciprocal insurance?

If a reciprocal insurance company sounds like an ideal setup for your association, then it is important to get started with the right guidance.

The insurance specialists at Axxima are ready to discuss how you can get started and help you through every step of finding the right insurance for you.

Axxima can help you get the exchange set up and also help with the daily operations of the exchange. Get in touch with the team at Axxima today if you’re interested in learning more.