Reciprocal insurance refers to an arrangement where a group of unincorporated individuals or organizations agree to share insurance risk among themselves. The arrangement is not informal. Members exchange indemnity contracts and individually appoint legal personnel called attorneys-in-fact to manage the affairs of the entity that results, which is known as a reciprocal insurance exchange.
Each member pays premiums into a specified account. When one member suffers a loss, the money is used to pay for the claim. Liability is limited to individual contribution. This arrangement is used to offer a broad range of policies that include recreational, renters, auto and home coverage. Some of the best known exchanges include the United Services Automobile Association, the Erie Insurance Group and the Farmers Insurance Group.
An exchange can be formed by a group of partnerships, corporations, limited liability companies, individuals, families or even public bodies such as municipalities. Jurisprudence governing the formation and operations of reciprocal insurance exchanges varies by locality. For this reason, what is legal in one area may be illegal in another. As of August 31, 2014, U.S. laws mandate individual states to regulate these bodies.
This form of insurance is extremely flexible. Members are free to structure, within legal limits, the arrangement in any way they like. It also tends to be cheaper than other forms of comparable risk management because the arrangement can be designed to minimize the number and level of fees and expenses.