A reciprocal insurance exchange, commonly known as an insurance reciprocal, is a progressive approach to managing challenging business risk and insurance requirements.

Insurance reciprocals allow a group of people or entities, known as “Subscribers”, to establish and finance their own insurance mechanism instead of procuring insurance from conventional commercial insurance providers.

In this arrangement, each Subscriber assumes a portion of the group’s risk, ensuring that when a claim is made, the collective contributions of Subscribers collectively cover the incurred losses.

Historical origins of insurance reciprocals

The concept of reciprocal insurance exchanges originated in New York back in 1881. A group of dry goods merchants, frustrated by high insurance costs for their buildings, initially considered cancelling their insurance and covering losses themselves.

However, they soon realized the inefficiency of this approach and opted to pool funds by making monthly deposits into a shared account which could be used to cover losses when they arise. This concept laid the foundation of the modern-day insurance reciprocal.

How does an insurance reciprocal work?

An insurance reciprocal serves as a distinct not-for-profit business model for an insurance company, where the subscribing members also own the company.

When someone becomes a Subscriber, they commit to an agreement to fund the losses of other Subscribers according to the exchange’s policy terms. If the losses in a year are less than anticipated, Subscribers may receive refunds or see the surplus grow within the Reciprocal, without additional premiums for expected profits.

Reciprocal insurance exchanges offer various advantages, including lower capital requirements and the ability to customize insurance solutions for Subscribers. Management is overseen by an Attorney-In-Fact (AIF) who makes decisions and coordinates an advisory committee of elected policyholders to handle operations, administration, underwriting, and potentially claims management.

While regulated by provincial Insurance Acts, Reciprocals are unincorporated associations. Unlike traditional companies, they do not undergo the same legal incorporation process. There are about 30 such exchanges in Canada covering a range of industries.

Characteristics of an insurance reciprocal

Insurance reciprocals offer distinct advantages including:

  • Low startup costs – they prioritize risk pooling over profit, resulting in lower subscriber premiums.
  • Claims control – subscribers gain control over coverage, claims and operational expenses, tailoring insurance to their specific needs.
  • Direct input – elected advisory committees allow direct input in reciprocal management. Unlike traditional companies, reciprocals are groups of insureds collectively insuring each other, giving Subscribers substantial control.
  • Access to reinsurance market – to mitigate losses, reciprocals access the reinsurance market, protecting all Subscribers from catastrophic losses they might not cover internally.

Looking to become an insurance reciprocal?

Are you considering whether becoming a reciprocal insurance company is the best way forward for your circumstances?

The insurance experts at Axxima can help you make the decision. Axxima is a firm of Canadian insurance consultants that have extensive experience in the design and management of reciprocals.

In addition to assisting with the initial setup, Axxima is also equipped to support your ongoing operational needs for your reciprocal insurance exchange.

If you have any inquiries about reciprocal insurance, don’t hesitate to reach out to Axxima today to explore the various options available to you.

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