Deciding If a Reciprocal Insurance Exchange Is Right for You
The first reciprocal inter-insurance exchange started in 1881 in New York. A group of dry-good merchants were not satisfied with their one-size-fits-all insurance policies and felt like they were overpaying for insurance coverage that they didn’t need. So the six business owners decided to pool their risks and exchange insurance contracts among themselves. This allowed the merchants to rid themselves of costly insurance premiums while insuring themselves and one another through their subscribers’ agreements.
It’s clear why a small group of merchants would choose to insure one another and risk-taking on the others’ potential losses for lower rates in the 1800s. But how can you know if a reciprocal inter-insurance exchange is right for you? And what does becoming a subscriber entail nearly 140 years after the creation of the first reciprocal insurance exchange?
First, it’s important to note that the main purpose of reciprocal insurance exchanges still stands true today: to save subscribers money on costly premiums.
When comparing reciprocals with stock or mutual insurance companies, one main difference to consider is the insurer’s reason for providing insurance. With a reciprocal insurance exchange, subscribers are the insurers, but they insure others to receive protection in return, not to receive profits for themselves. In stock insurance companies, on the other hand, the insurers are providing coverage in order to make a profit. While this may not directly affect the quality of your insurance coverage, it may be reflected in your annual premiums.
Another benefit of becoming a reciprocal subscriber is that you are a partial owner of the company, so your opinion can help make a difference in the way the reciprocal is run. Still, subscribers in 2021 won’t see as much responsibility as the founders of reciprocal insurance exchanges had. Liability for reciprocal subscribers is limited, meaning you are protected from being held responsible for other subscribers’ insurance claims, and you can generally rest assured that you won’t need to be concerned with powers of attorney like reciprocal subscribers in 1881.
But every rose has its thorns, and it’s important to do your research before jumping headfirst into a policy with a reciprocal insurance exchange.
Newer reciprocals can face more setbacks than new stock insurance companies, for example. This is primarily because a reciprocal’s net worth is dependent on the number of subscribers it has. A new reciprocal with few subscribers may not be able to support its subscribers’ coverage needs.
Another reason reciprocals can be riskier options is that they are made up of two entities, the reciprocal insurance exchange (owned by subscribers, managed by a board of governors) and the attorney-in-fact. This means that reciprocals need to cover the cost of insuring subscribers, running an organization, and the cost of the reciprocal’s AIF. These costs, along with the risk of not having enough subscribers to insure everyone, can leave reciprocals posing more risks for subscribers than rewards.
Still, some long-standing reciprocal insurance exchanges, like Farmers Insurance, are just as reliable as any other mutual or stock insurance provider. The best way to judge the financial reliability of an insurer is to check its A.M. Best rating. That way, you can know whether a certain reciprocal insurance exchange is well equipped to provide for your insurance needs.
Looking into your insurance provider’s structure can be confusing. That’s why Insurify answered some of the most frequently asked questions about reciprocal insurance exchanges to help you find some clarity in the chaotic insurance industry.