What is a Reciprocal Exchange?

Reciprocal exchanges are groups or collections of insurers that provide benefits to one another. Usually structured as a non-profit entity, the reciprocal exchange is sometimes known as an inter-insurance exchange. This arrangement makes it possible to share coverage with other providers, effectively indemnifying each entity that is part of the exchange. While functioning in a manner that is similar to that of a mutual insurance company, there are several key differences.

One of the distinguishing characteristics of a reciprocal exchange is that the entity is not incorporated. This is different from a mutual insurance company that is incorporated. As a result, the individual members of the exchange remain liable, rather than enjoying the joint liability that would be present if the entity were incorporated. Current legislation in jurisdictions where the creation of this type of insurance pool generally do place limits on the liability of each member or subscriber, often to no more than the assets held by the individual member.

A wide range of entities can become members of a reciprocal exchange. Sometimes referred to as subscriber, the member may be an individual, a limited liability corporation, a limited partnership, or a general corporation. The terms and conditions for membership will vary from one exchange to the next, although all must comply with local regulations in order to function as a legal entity.

Municipalities may also choose to form a reciprocal exchange as a means of providing a wider range of insurance benefits to those that participate in the entity. This makes it possible to cross-indemnify a number of small town governments, counties or parishes, or even small cities, without incurring the expense that would be involved in creating comparable insurance coverage packages. The exchange is funded by the deposits made by each member entity, effectively making it possible for all members to enjoy benefits that would be difficult to secure in other circumstances. In times of economic troubles, the model of a reciprocal exchange has become increasingly attractive to local jurisdictions with limited resources.

To manage the reciprocal exchange, the entity engages the services of a legal professional who functions as an attorney in fact. This individual is normally entrusted with all the assets of the entity, and is free to manage them in accordance with the bylaws that govern the organization. In most situations, all participants in the exchange retain rights to the assets pledged, a situation that makes the attorney in fact more of a trustee, and the members or subscribers beneficiaries of the reciprocal trust arrangement.