An unincorporated association whose members provide coverage for one another is a mutual aid society. Mutual aid societies are voluntary associations of individuals who join together to provide mutual assistance and support to one another in times of need. Mutual aid societies typically provide financial assistance to members in the form of insurance, loans, and other forms of aid.

Reciprocal inter-insurance exchange

AN reciprocal insurance exchange or simply a reciprocal it is a association without legal personality where subscribers exchange insurance policies to pool and spread risk. For consumers, reciprocal exchanges often offer policies similar to those offered by a limited company or a mutual insurance company. Major reciprocal exchanges in the US include USAA, Farmers and Erie.


The reciprocals began in 1881, when dry goods merchants in New York were unhappy with their experience with other insurers covering their buildings. Store owners believed they had well-maintained buildings and were being overcharged for the risk rating methodologies used by insurers at the time. As traders were well capitalized and could absorb certain losses, they decided to self-insure to reduce their insurance costs. Subscribers compensated each other when a member suffered a loss, but the process of charging non-sufferers and passing funds to those who suffered losses proved cumbersome. Reciprocal exchanges managed by attorneys thus were organized to solve this problem.

How a reciprocal works

“Reciprocal insurance” means insurance arising from the mutual exchange of insurance contracts between persons in an unincorporated association under a common name through an attorney-in-fact with authority to bind each person as both insured and insurer.

This definition implies three parties: the Subscribers (policyholders), the exchange (an association without legal personality) and the attorney.

Each policyholder is a subscriber to the exchange. Subscribers do not “own” and do not “own” the exchange, as it is an unincorporated association and therefore has no owners. However, subscribers generally have a governance role over the exchange (such as an advisory committee or Board of Governors). In some reciprocal exchanges, the operating surplus generated by the exchange belongs to the subscribers, but is held by the exchange in accounts called subscriber savings accounts, and the proxy may return unnecessary money to subscribers in some circumstances. Subscribers can be natural peopleLLCs or LPs, partnershipsor corporations.

The proxy, through the underwriters’ power of attorney, is authorized to administer the reciprocal exchange and carry out its day-to-day operations, including issuing policies, depositing fees, managing investments and handling claims. The proxy can solicit and admit new subscribers to the exchange. The attorney-in-fact may be an individual, a company or a legal entity. In exchange for his services, the attorney receives payment of the fees charged in the exchange. The AIF can be owned by the reciprocal (an owner reciprocal) or contracted from a third party (a non-owner reciprocal).

Reciprocal insurance policies generally cannot be rated, preventing policyholders from being charged an additional sum of money if the cost of operating the reciprocal exchange is higher than expected. Reciprocals also issue evaluable policies.

Insurance in the United States is regulated primarily by each of the states, as provided by the McCarran-Ferguson Act. There is considerable variation in how state law governs reciprocal exchanges. Some states have specific laws governing reciprocal exchanges, while others include regulation of reciprocal exchanges under the regulations that govern captive insurers.

Reciprocal claims can be initiated directly by policyholders or by a proxy. In theory, a small group of individuals or companies could come together to insure each other and form a reciprocal. In consumer insurance, more recently, entrepreneurs have set up attorneys who then form reciprocals by providing initial capital, attracting subscribers and managing the exchange. In some states, counties form reciprocals for cross indemnification towns, cities, villages and counties.

Comparison with other forms of insurance

Reciprocals are sometimes confused with mutual insurance companies. While reciprocals and mutuals may offer similar products, there are differences. A reciprocal is unincorporated; a mutual is incorporated and therefore can be said to be “owned” by its policyholders. However, in both a reciprocal and a mutual, it can be difficult for widely dispersed policyholders to force material changes in governance. A mutual insurance company is usually self-governing and policyholders may have a role in electing the board of directors. Mutuals are typically considered not-for-profit, but mutuals may own for-profit stock insurance companies. While the reciprocal exchange itself is technically not-for-profit, it may accumulate surplus, the proxy may be for-profit, and the proxy may have for-profit outside shareholders who are not the subscribers.

In 1981, Congress authorized the creation of risk retention groups (RRGs) to provide certain forms of commercial liability insurance. RRGs and multiparents captives have features similar to reciprocals, notably the concept of similarly situated parties agreeing to hold each other. While reciprocals can offer personal and commercial insurance, RRGs and captives are more restricted in their product offerings, membership and governance.

A concept similar to reciprocal exchange has existed for centuries in countries with large Muslim populations, called takaful. to be compatible with shariatakaful operators act similarly to proxies in the reciprocal structure, and policyholders make “donations” to the exchange to pay for losses.


See too


  • Reinmuth, Dennis F. (1967). The regulation of reciprocal insurance exchanges. ISBN 0-256-00676-8.
  • Dunn, Edward Clare. USAA: Life Story of a Business Cooperative. ISBN 0-07-018280-9.
  • Ringenbach, Paul T. (1997). USAA. A Tradition of Service 1922–1997. ISBN 0-89865-993-0.


External Links

Source: Reciprocal inter-insurance exchange

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