Reciprocal Insurance Exchange

Definition - What does Reciprocal Insurance Exchange mean?

A reciprocal insurance exchange refers to a group of individuals who agree to share each other’s insurance risks through the exchange of insurance contracts or policies. Each member of this group appoints and authorizes an attorney-in-fact who manages the affairs of the exchange.

In addition, a reciprocal insurance exchange could also refer to an aggregate of subscribers who via an attorney-in-fact agree to furnish themselves and each other with policies against a designated risk. Therefore, the subscribers are both the insurers and the insured. These subscribers usually transact an insurance business in issuing and exchanging insurance contracts. A reciprocal inter-insurance group or organization has its domicile in the state in which it was created

Insuranceopedia explains Reciprocal Insurance Exchange

A reciprocal insurance exchange constitutes of groups of persons, corporations, or firms, also referred to as subscribers. These subscribers exchange insurance contracts under the watch of an attorney-in-fact whose primary role is managing the group's affairs. Therefore, each subscriber effects a similar agreement that empowers the attorney-in-fact to act on their behalf. The attorney assumes an underwriting liability on the agreed policies covering the risks of the members. This helps the subscribers to avoid any risks associated with their policies as they are not the underwriters.

Under customs laws, the attorney-in-fact is compensated for their management role through a deduction of a percentage of premium income. It is also these premiums that fund most of the operating expenses. In most cases, the attorney-in-fact is the promoter and the organizer of the exchange and provides initial financing through an interest bearing surplus note.

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