Reciprocal insurance, better called a reciprocal insurance exchange, might sound complicated. However, it helps to think of it as non-mutual insurance for similar types of people, where everybody shares the same risk and expenses. It refers to a designated group that needs the same kind of insurance and shares the risks and expenses of all of their coverage policies together. With a reciprocal plan, your rates are lower than average and often fixed to one low price. Here’s an explanation of these exchanges and whether you should get reciprocal insurance.
What Does Reciprocal Insurance Mean?
In the context of insurance, reciprocal means that an unincorporated group of individuals and organizations, collectively referred to as subscribers, all agree to share the risks of insurance loss payouts. Reciprocal insurance is sometimes referred to as interinsurance exchanges.
You can think of reciprocal insurance as shared-risk insurance. It protects you from having to pay more for your insurance due to your own circumstances. Everybody weathers the burdens of payouts together, so everyone is more likely to get the affordable coverage they need to recover from a setback. This can be quite an advantage compared to something like minimum liability car insurance, where companies will raise your rates based on your driving record and any past accidents.
Some examples of major reciprocal insurance exchange providers in the United States include Farmers, Erie, and USAA. These providers specialize in certain types of clients. For example, Farmers often serves small business owners. USAA serves active or retired military service members and their families. Reciprocals depend on the size and financial stability of their subscriber base, so picking a larger provider like the ones above is a good way to minimize risk.
How Do Reciprocal Insurance Exchanges Work?
When you hear about reciprocal insurance, you’ll usually hear the term “attorney-in-fact.” This is a person, third party or otherwise, usually chosen and monitored by the reciprocal insurance company’s board of governors. The board provides general oversight, while the attorney-in-fact manages the distribution and adjustment of policies.
During a growth period in the industry or a generally good time when very few claims are being filed, you could receive a surplus that would assist with paying claims of your own. For losses that the reciprocal receives, however, all subscribers evenly share the burden to cover the difference. In a stable or growing industry, reciprocal exchanges can be a useful source of liability or property damage coverage. Even just for people who prefer to get insurance of any kind at a lower rate for being responsible, there might be an exchange provider in your area.
What Are the Benefits of Reciprocal Insurance?
In some cases, a reciprocal exchange may be able to offer you a non-assessable policy. A non-assessable policy has a fixed rate and fees that never change, even if you need more coverage than described in your initial policy. Since everybody wants to keep their rates down, subscribers have an incentive to act carefully so that they do not need insurance payouts, leading to better monthly premiums for everyone.
There is technically a risk of too many subscribers making mistakes or suddenly needing coverage, which would cause everyone to pay a higher premium for a while. That said, the main advantage of reciprocal exchanges is that during a time with few accidents or other losses, all the participating subscribers enjoy affordable insurance. When everybody shoulders the responsibility to pay for covered losses, it also adds up to better coverage, such as higher maximum limits.
If the exchange experiences profit due to positive growth in the industry, you even have the potential to earn dividends. Under federal law, a subscriber’s surplus from a reciprocal exchange cannot be taxed. This extra money is usually held in a separate account and will be used when paying for expenses related to filing a claim.
Are Reciprocal Insurance and Mutual Insurance the Same?
Although reciprocal insurance exchanges and mutual insurance companies both involve shared risk, they are different types of insurance providers. Reciprocal exchanges usually involve people or businesses with similar insurance needs. It’s common to see exchanges for professions that might face property damage or liability expenses, such as truck drivers or doctors. Mutual insurance companies are usually not limited to specific types of people, although that rule isn’t universal.
With both reciprocal insurance exchanges and mutual insurance, you join a network for people to share risks and pool insurance benefits. For this reason, larger providers are a good way to find coverage at a stable price. However, reciprocal exchanges are mainly different because an attorney-in-fact raises or lowers your rates, not the company itself.
Most providers, like the typical car insurance provider, can adjust policy terms or charge you higher fees after you file a claim. A mutual insurance company could technically do the same to make more money. Some mutual insurance companies may make up for losses that have nothing to do with customer claim rates or other real expenses. In contrast, an exchange’s attorney-in-fact will only analyze the market and adjust the claim rates of the subscribers when calculating premiums and fees.
Should You Get Reciprocal or Mutual Insurance?
You aren’t required to choose one of these or the other, and both can be beneficial. For example, if you were a doctor, you could get a mutual insurance policy with State Farm for your homeowner’s and health insurance policies, while a reciprocal exchange covers you for malpractice or other liability expenses on the job. A lot of the major insurance providers you’ve likely heard about are mutual providers, such as Liberty Mutual, State Farm, and American Family.
Sharing insurance expenses with a group of like-minded, responsible people helps everyone get better support if they do end up needing coverage. Overall, if you have the opportunity to do so, reciprocal insurance exchanges are a good idea. You can get coverage at a lower monthly premium, often due to the more efficient, focused insurance coverage plan. As always when getting insurance, it pays off to look at the kind of coverage you need, the costs you can reasonably afford, and the risks of certain expenses or accidents.
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