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A reciprocal insurance exchange (or reciprocal) is a not-for-profit risk-sharing arrangement where a group of members, called Subscribers, agree to cover each other’s losses rather than purchase insurance from a traditional for-profit insurer.
Each Subscriber contributes to a shared pool and when a claim is made, it is paid from this collective fund.
How does a reciprocal work?
When joining a reciprocal, a Subscriber signs an agreement to mutually insure losses experienced by others in the group, as long as they fall within the agreed policy terms.
Unlike traditional insurers that charge extra for profit margins, reciprocals exist solely to serve their members. Any surplus earned through the reciprocal is returned to Subscribers as dividends or retained for future claims.
A reciprocal is managed by an Attorney-in-Fact (AIF). This person can be either in-house or contracted. They oversee operations including underwriting, claims and administration.
An elected advisory board, which can be made up of Subscribers or independent board members, works alongside the AIF to guide key decisions. While reciprocals must follow provincial insurance laws and licensing requirements in Canada, they are unincorporated and therefore simpler to set up than traditional insurers.
Over 30 reciprocals currently operate in Canada across various industries.
The origins of reciprocals
The concept dates back to 1881 in New York, when a group of merchants, frustrated by high premiums, pooled money to cover each other’s losses.
This evolved into a more structured system where members made regular contributions to a shared account. This paved the way for modern reciprocal insurance exchanges.
Key benefits of reciprocal insurance exchanges
There are a number of benefits to reciprocal insurance exchanges.
Since there’s no goal to make profits for shareholders, premiums are typically lower and capital requirements to start a reciprocal are lower than for commercial insurers.
Members also have more say over claims processes, coverage and costs. This is ideal for industries with specific insurance needs. Subscribers can elect advisory board members and influence how the exchange is run.
Reciprocal insurance can be customized to fit niche sectors often underserved by commercial insurers. This flexibility allows coverage for unique risks.
To protect the exchange from large losses, many reciprocals purchase reinsurance, especially for catastrophic events, adding an extra layer of security.
Challenges to consider
Starting a reciprocal requires a sufficient number of committed Subscribers to ensure a sustainable pool.
If the group is too small, administrative costs (like hiring the AIF) may increase premiums. It also takes time and coordination to build a committed, organized group willing to share risk and go through the setup process.
However, once established, a reciprocal can offer comparable protection to traditional insurance while providing greater control and cost-effectiveness for its members.
Want to start a reciprocal?
If a reciprocal sounds like the right model for your group or association, the team at Axxima can guide you through the setup process, help manage day-to-day operations, and tailor a solution to your needs.
Contact the team of insurance experts at Axxima today to explore your options.