Why you can trust The Zebra

The Zebra partners with some of the companies we write about. However, our content is written and reviewed by an independent team of editors and licensed insurance agents, and never influenced by our partnerships. Learn more about how we make money, review our editorial standards, reference our data methodology, or view a list of our partners.

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. 

Your insurance policy represents your ownership of the company and your agreement to comply with the other members of the insurance provider.


Benefits of reciprocal insurance exchanges

Aside from owning a part of the company that insures you, subscribing to a reciprocal insurance exchange can keep premiums low as member contributions accrue and offset operating costs. Simply having a stake in your insurer incentivizes subscribers to behave to the benefit of everyone involved — this means people drive more carefully or take extra precautions to protect their property from a loss, which in turn should lessen the instances of claims and keep annual premiums low. 

Since customers are the driving force behind a reciprocal exchange, the company may raise prices less often in pursuit of profit. Reciprocal insurance exchanges are nonassessable policies by design, meaning subscribers aren’t charged more in insurance premiums if operating costs are higher than expected.

companies

Popular reciprocal insurance exchange companies


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 insurersMost_Affordable_OutlinedFreeform_Icons_trp.png

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

Recommend_OutlinedFreeform_Icons_trp.png

 

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. 

Make an informed decision: compare insurance rates today.

or
Location pin icon
glyph-shield-checkmark No junk mail. No spam calls. Free quotes.
Renata Balasco
Renata BalascoAssociate Content Strategist

Renata is a licensed insurance professional and content strategist responsible for creating home and auto insurance guides for The Zebra.

Renata's background in technical writing and her experience working in the insurance industry informs her work. She holds a bachelor’s degree in communications.

Renata's work has been cited by Car and Driver

About The Zebra

The Zebra is not an insurance company. We publish data-backed, expert-reviewed resources to help consumers make more informed insurance decisions.

  • The Zebra’s insurance content is written and reviewed for accuracy by licensed insurance agents.

  • The Zebra’s insurance content is not subject to review or alteration by insurance companies or partners.

  • The Zebra’s editorial team operates independently of the company’s partnerships and commercialization interests, publishing unbiased information for consumer benefit.

  • The auto insurance rates published on The Zebra’s pages are based on a comprehensive analysis of car insurance pricing data, evaluating more than 83 million insurance rates from across the United States.