Professional groups, insurance agencies and public institutions often encounter a variety of financial risks during the course of normal operations. As a result, some entities decide to create reciprocal insurance that allows them to share the risk incurred by each and thereby reduce each entity's total risk.
Reciprocal insurance is used by unincorporated entities, also know as reciprocal inter-insurance exchanges, that have subscribers and or members that have agreed to act in an insurance capacity to share or spread the risk by certain transactions. Several prominent insurance organizations and medical malpractice groups throughout the country are also part of reciprocal exchanges. Each reciprocal is managed by an Attorney in Fact (AIF), a separate legal entity who is selected by the insurer's board of governors.
While companies in medical, insurance and health industries are more likely to take part in a reciprocal insurance exchange due to the nature of the services they provide, a variety of entities can become members or subscribers in a reciprocal. These include municipalities, universities, general corporations, limited corporations and limited partnerships, as well as individual subscribers. CURIE, a Canadian reciprocal, consists of 58 member universities and pools such risks as injuries, property damage and liability for errors and omissions.
The primary benefit of reciprocal insurance is the shared liability that it provides for its members. This allows members to share the cost of retained losses and other forms of insurance. Members also become owners in the company and can benefit from the surplus savings and contributions that accumulate in individual interest-bearing surplus savings accounts (SSAs). This surplus can be applied to reduce the cost of individual insurance or be reinvested in the company. SSA savings can become a source of tax-deferred income and can be deducted from tax liability by the insurance exchange.
Members of a reciprocal are individually liable for the financial obligations incurred by the exchange. However, the entities themselves are indemnified, or protected, from these liabilities. Once a reciprocal exchange has a sufficient number of members, surplus contributions or other capital funds it may create a non-assessable policy, which exempts members form making further contributions toward operating costs.