Reciprocal insurance exchange is a form of insurance organization where businesses and individuals exchange insurance contracts and share the risks connected with those contracts among themselves. Reciprocal insurance exchange policyholders are also known as subscribers, and this insurance helps to reduce the insurance risks of business contracts.
A board of governors manages this insurance exchange, overseeing AIF and approving insurance rates. Policyholders often use AIF, which runs the day-to-day operations of the exchange for policy exchange. This exchange companies issue both assessable and non-assessable policies.
How Does it Work?
The reciprocal insurance exchange brings together two different entities or businesses along with an attorney-in-fact (AIF). It allow subscribers to exchange policies through AIF and share risks among themselves.
Legislative provisions specific to local reciprocal insurance companies often govern their operations. The AIF is accredited to carry out business transactions on behalf of another entity, which is the reciprocal insurance company. It handles the daily operations of the reciprocal and holds power of attorney status.
Reciprocal Insurance Exchange Characteristics
Before opting for this type of insurance, you should be aware of its characteristics. The following are five main characteristics of reciprocal insurance exchange:
Fewer Set-Up Costs and No Profit Margins
This is a key advantage of opening a reciprocal insurance exchange. Only a very small capital is required to begin this insurance. A reciprocal aims to merge risk, and unlike an insurance company, it does not focus on generating shareholder profit. This approach helps reduce the premiums that subscribers pay.
Power Over Claims and Operation Costs
This exchange grants subscribers control over the offered coverage, operation costs, and claims process to meet their special needs and operational goals. This is a key benefit compared to insurance companies that choose not to cover some less profitable coverages. It also allows subscribers to choose their preferred limits and offer coverage on their insurance contracts.
Direct Input in How It Operates
An elected advisory committee runs reciprocals. If subscribers are dissatisfied with the current management, they can elect a new advisory board to select and collaborate with the AIF. Reciprocals are not companies as much as they are groups of policyholders with the same interest who have decided to insure others. For this reason, subscribers have significant control over how the reciprocal operates.
Access to the Reinsurance Market to Reduce Losses
Reciprocals can reduce their vulnerability to losses by purchasing reinsurance for all subscribers of the reciprocal. Reinsurance protection covers large catastrophic losses that exceed the reciprocal’s capacity.
Difficult Beginning
A reciprocal insurance exchange most times depends on having sufficient subscribers to shield the losses of any subscriber. This means a reciprocal can be very risky if the subscribers are too small. However, it is not expensive to begin a reciprocal, but several costs like AIF payments and organization costs must be covered.
You will also need a determined group to accept to pool losses together and follow the same steps of creating a reciprocal. For this reason, reciprocals aim at specific groups and associations to help them have a large pool of subscribers, reducing the risk for all the policyholders in the pool.
What Are the Advantages of a Reciprocal Insurance Exchange?
There are several reasons why insurance companies would request a reciprocal insurance exchange. This exchange can operate on a nonprofit basis to give every policyholder affordable insurance coverage.
Compared to standard insurance decisions, insurance exchange premiums may be lower because policyholders share risks and insurance costs. Other advantages of reciprocal insurance exchange include:
- It allows subscribers to have a direct say in decision-making processes.
- Also, it usually comes in customized coverage.
- It may be cost-efficient as risk is shared across entities.
- It may result in profit sharing.
- Underwriters may be granted direct access.
What Are the Disadvantages of a Reciprocal Insurance Exchange?
A reciprocal insurance exchange primarily serves specific professions or industries, restricting access to those outside these groups. It may also have requirements that must be met in advance, and for that reason, not everyone will be eligible for it. This exchange often operates with smaller resources, staff, and networks; therefore, it has a strong financial risk. Other disadvantages of reciprocal insurance exchange include:
- Certain industries and individuals may not qualify for membership.
- Membership requirements must be met.
- It most times lacks portability.
- It may bear the risk of the other entity’s claims indirectly.
Is a reciprocal insurance exchange best for me?
Just like every insurance decision you make, it is vital to consider your special needs for coverage, its costs, and benefits. While different insurance companies can meet different needs, it is important to compare several reciprocal insurers before deciding to be part of one. However, when comparing each type of insurance, consider every company’s reason for offering insurance.
