What Is Reciprocal Insurance?

Reciprocal insurance is very different from traditional insurance. Rather than buying insurance from a standard insurance company, policyholders insure other policyholders’ losses under a mutual insurance agreement. Therefore, policyholders are the insured and the insurer, the owners of the company.^[1]

Here’s what you need to know about how reciprocal insurance works and whether it’s a good home insurance option for you.

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What is reciprocal insurance?

Reciprocal insurance is a type of insurance in which policyholders — also known as subscribers — collectively insure each other through an unincorporated association. Reciprocal insurers operate completely without the involvement of traditional insurers and their shareholders. Instead, reciprocal insurers pool risk among subscribers.^[2]

Sometimes called peer-to-peer models, reciprocal insurance exchanges work by relying on others to engage in good faith and a mutual exchange of insurance contracts.

When you sign up for a policy, you’ll likely need to make a full premium deposit into the pool that pays for policyholders’ claims. Having a policy means you own part of the exchange and have a say in what it does.

How reciprocal insurance works

Reciprocal insurance allows a group of policyholders to exchange insurance coverage with each other and avoid the involvement of traditional insurers altogether. This means that policyholders effectively own their policies, liabilities, and risks, rather than paying money to an insurance company to take on the risk.

Subscribers share risks, losses, and profits. The exchange redistributes any profits earned among the subscribers. Typically, an attorney-in-fact given power of attorney and paid a fee handles the management of these insurance exchanges, including administrative duties, legal and day-to-day operations, and claims payments.

Generally, reciprocal exchanges have an advisory committee or board of governors comprised of original subscribers who have the authority to oversee the attorney of a domestic reciprocal insurer and help this person make decisions. The exchange and the attorney-in-fact are separate entities.

How reciprocal insurance compares to other insurance models

Reciprocal insurance differs from other traditional insurance models in numerous ways. Stock and mutual insurers are two of the most common kinds of insurance companies in the property and casualty insurance industry.

Like many corporations, a board of directors runs the operations of a stock insurer. Stockholders own the insurer. The objective of stock companies is to make money for stockholders, so they don’t share profits or losses with the actual policyholders.

Mutual insurance companies have some similarities to reciprocal insurers. Policyholders own mutual insurers, but a board of directors runs the company. Mutual insurance policyholders don’t share as directly in the profits and losses as reciprocal insurance policyholders do, but they typically earn dividends if surplus funds remain after the insurer pays out claims and expenses.^[3]

Type of Insurer	Management	Ownership	Financial Practices
Reciprocal insurance exchange	Attorney-in-fact and committee of policyholders	Policyholders	Split profits and losses among policyholders
Stock insurer	Board of directors	Stockholders	Profits split among stockholders as dividends
Mutual insurer	Board of directors	Policyholders	Profits split among policyholders as dividends

Benefits of reciprocal insurance

Reciprocal insurance comes with various benefits for policyholders, including:

• 

  Lower premiums

  Reciprocal insurance exchange policies are non-assessable policies, which means premiums don’t increase with operating expenses. Premiums are also often lower because members have no incentive to raise prices on themselves. Because they share the risk of claim payouts, members may drive more carefully or take extra insurance protection measures for properties.

• 

  Personalized service

  If you need to file a claim, you’ll deal with other exchange members and your appointed attorney-in-fact, rather than claims adjusters from a large, traditional insurer.

• 

  Community involvement

  Reciprocal insurance allows you to own part of your insurance company and even have a say in what it does. You’ll get to work with other members to ensure the exchange handles premiums and claims fairly.

Drawbacks of reciprocal insurance

Reciprocal insurance also has some drawbacks to consider, including the following factors:

• Shared financial risk: You also share the financial risk and liability of each subscriber. If other members file a large number of claims in a given year, this could lead to losses and higher premiums.

• Coverage restrictions: Reciprocal insurance exchanges often don’t offer all the different types of insurance traditional insurers do. Depending on the size of the reciprocal exchange, it might not be large enough to provide the same coverage levels as traditional insurers.

• Limited availability: Reciprocal insurance exchanges may not be available everywhere and usually aren’t as widely available as traditional insurers. They’re also often more difficult to join than standard insurers, as they can have strict prerequisites or requirements you must meet before joining.

Should you get reciprocal insurance?

Reciprocal insurance isn’t right for everyone. Some groups reciprocal insurance can be a good option for include the following:

• Homeowners in stable communities

• Small businesses

• Professional associations

High-value homes are typically not ideal candidates for reciprocal insurance because they often come with expensive, unique risks. But if a small neighborhood consists of similarly valued homes, it can be a good candidate for reciprocal insurance.

Whether reciprocal insurance is right for you depends on various other factors, including your coverage needs, your own use of your property, how much risk you take on, the location of the insurer, and whether it’s more affordable than traditional insurance. Reciprocal insurance also requires more involvement than you’d need to commit to with a traditional insurer.

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How to join a reciprocal insurance company

If you’re looking to join a reciprocal insurance company, you’ll need to do some research. Search online for local reciprocal insurance exchanges — keep in mind that your state may not have any. You can also ask friends, family members, and neighbors if they know of any reciprocal insurance companies.

Read reviews from members and find any information on the exchange’s financial strength if you do find one. Learn as much as you can about the company’s policies, requirements, and claims handling before you join.

If a certain exchange meets your expectations, contact the company to begin your application process. Before you’re officially a member of the exchange, you’ll likely need to sign a subscribers’ agreement or statement.

Reciprocal insurance FAQs