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Ted O. Hall
Property and Casualty Insurance
Accounting and Taxation

"I understand the ins and outs of the Captive Insurance Industry"

Basic Primer
Reciprocal Insurance Exchanges*

Reciprocal insurance exchanges are little understood but not an uncommon form of insurance organization. Two well-known national carriers USAA and Farmers Insurance Group operates as reciprocals. Several medical malpractice companies around the country were originally organized as reciprocals, including The Doctors Company, Southern California Physicians Insurance Exchange, MEIC, Nation's Capitol Reciprocal Insurance Company, American Physicians Insurance Exchange, Washington State Physicians Insurance Exchange, Illinois State Medical Insurance Exchange, Medical Inter-Insurance Exchange of New Jersey and El Camino Insurance Exchange.

A reciprocal insurance exchange involves the organization of two separate entities:

  1. Reciprocal Inter-Insurance Exchange--
  2. A form of unicorporated insurance company in which subscribers exchange policies through an Attorney in Fact (see item2, below) in transactions that share or spread their risk. The reciprocal insurer is overseen by a Board of Governors whose responsibilities typically include general oversight of the reciprocal, selection of the Attorney-In-Fact (AIF), monitoring the performance of the AIF, and approval of rates. The reciprocal may issue either an assessable or non-assessable policy, although the non-assessable policy is most common among reciprocals today. A unique aspect of a reciprocal is the multiple surplus accounts, each of which serves a distinct purpose but all of which are co-mingled and available to pay claims. One of the more important surplus accounts is the Subscribers Savings Accounts (SSA's).

  3. Attorney in Fact--
  4. A separate leagal entity that typically runs the day-to-day affairs of the reciprocal insurer. The policyholdres of a reciprocal, usually called subscribers, provide a power of attorney to the AIF, giving the AIF legal authority to act on their behalf in managing and adminestering the reciprocal. The AIF is selected by the Board of Governors of the reciprocal to manage all its affairs. A formal magement contract is entered between the AIF and the reciprocal. The management agreement may be a contract in perpetuity or a contract for a specific term. The AIF may be owned by the reciprocal itself (a proprietary AIF) or by an independent third pary (anon-propritary AIF) or a combination of both. If a corporation, the AIF is governed by a Board of Directors that often include one or more members of the Board of Governors of the reciprocal.

The advantages of the reciprocal form of organization are principally to the AIF and are as follows: