Reciprocal insurance exchanges: how they work and what to check

A reciprocal insurance exchange is an insurer organized as an association of policyholders, called subscribers, who insure one another through a common manager known as the attorney-in-fact. It has no stockholders. The subscribers own the surplus in theory, but the attorney-in-fact, which is often a separate company that charges a fee, runs the business day to day. For a buyer the product looks like any other policy from a licensed insurer; the differences are in governance, fees, capital and what happens to the surplus.

The structure in plain terms

Florida's chapter on reciprocal insurers, Fla. Stat. § 629.011, describes a reciprocal insurer as an "unincorporated aggregation of subscribers" that acts individually and collectively through an attorney in fact. Each subscriber signs a subscriber's agreement and a power of attorney that lets the attorney-in-fact (AIF) issue contracts, collect premium, hire staff and manage investments for the exchange.

Four parts matter:

1. Subscribers. The policyholders. They receive coverage, and in the traditional model they share in the exchange's surplus.
2. The attorney-in-fact. A person or company, usually a corporation, that manages the exchange for a fee. It can be owned by the subscribers' group, by outside investors, or by an insurance group.
3. The subscribers' advisory committee. A body that oversees the exchange's finances and operations. Under Fla. Stat. § 629.201, at least two-thirds of it must be subscribers who are not the attorney-in-fact or connected to it, and it arranges an audit of the insurer's and the attorney's accounts. Rules in other states differ.
4. Surplus. The exchange's capital, built from retained earnings and, in newer exchanges, from surplus notes sold to investors. See statutory surplus.

The exchange is licensed and examined by the state insurance department, and AM Best rates it like any other insurer. That makes it an admitted insurer in states where it holds a certificate of authority, with the usual guaranty fund backing if it fails. This is different from a captive, which insures its own owners' risks, and different from a mutual, which is an incorporated company owned by policyholders; see mutual vs stock insurance companies: what the difference means for you.

Examples a business buyer may meet

• ERIE. The insurer is Erie Insurance Exchange, owned by its subscribers. Erie Indemnity Company, listed on Nasdaq, is the attorney-in-fact. It sells, underwrites and services the business for a management fee of up to 25 percent of the Exchange's premiums, which its board kept at 25 percent for 2026, according to the company's 2025 annual report. See Erie Insurance.
• Farmers. Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange are reciprocals managed by Farmers Group, Inc., a subsidiary of Zurich Insurance Group, as attorney-in-fact. See Farmers Insurance.
• The Doctors Company. A physician-owned reciprocal exchange managed by its own attorney-in-fact, in medical professional liability. See The Doctors Company.
• New exchanges. In July 2026 AM Best rated WoodStar Reciprocal Exchange of Little Rock, Arkansas, A- (Excellent). It is capitalized by $220 million of 9.5 percent surplus notes due 2041, writes through the Accelerant Risk Exchange for a selected group of specialty MGAs, and relies heavily on reinsurance, according to Insurance Journal's report of the rating. See Accelerant.

Some Risk retention groups (RRGs): how they work and what to check are also organized as reciprocals, which adds a federal layer to the state rules.

Why the structure raises governance questions

In a stock company, shareholders elect the board and can sell. In a mutual, policyholders elect the board. In a reciprocal, the subscribers' control is mostly indirect, through the advisory committee, while a separate company holds the power of attorney. Two issues follow.

The fee. The AIF is paid from the exchange's premium, often as a percentage. Regulators have noticed. According to a McDermott summary of the NAIC's Summer 2025 meeting, the Financial Condition (E) Committee approved a working group because of a rise in newly formed reciprocals and difficulty in judging whether attorney-in-fact fees are fair. The concern is that a fee based on gross premium rewards growth and can encourage underpricing, and that fees buried in a power-of-attorney document are less visible than a separate services agreement. A Mitchell Williams summary of the Reciprocal Exchanges (E) Working Group's July 22, 2026 meeting says it exposed amendments to the NAIC's holding company model act (Model #440) and its model regulation (#450) for comment through August 21, 2026. The drafts would add attorney-in-fact contracts to the definition of control, require fair and reasonable fees, require commissioner approval and cap charges at the cost of services plus a reasonable profit. They were proposals, not law, as of that date.

The capital. Older exchanges built surplus over decades. Newer ones often start on surplus notes, which are debt-like instruments that count toward regulatory surplus. AM Best's November 2025 market segment report counted 27 reciprocals launched from 2017 to 2024, 14 of them in Florida, and said their combined direct premium grew 83 percent from 2022 to 2024. The report said most rated reciprocals have very strong balance sheet assessments, with new formations mostly at the lower end of that category because of their dependence on surplus notes. That is a reason to read the rating letter, not a reason to avoid the structure.

Assessable and nonassessable policies

Reciprocal policies can be written either assessable or nonassessable. An assessable policy lets the exchange charge a subscriber an additional amount if the exchange's surplus is impaired, up to the limit in the policy and the state statute. A nonassessable policy carries no such liability, but the right to issue them depends on surplus. Under Fla. Stat. § 629.261, if a nonassessable exchange's surplus becomes impaired, the regulator must revoke its authority to write nonassessable policies, after which new and renewal policies must carry contingent assessment liability.

For most commercial buyers the practical question is simple: does this policy say it is nonassessable, and if not, what is the maximum assessment? It is in the policy and the subscriber's agreement.

A hypothetical comparison

Say a 40-employee contractor receives two renewal quotes on a package policy: one from a stock insurer and one from a reciprocal, both rated A (Excellent). The reciprocal's premium is 6 percent lower. The contractor's broker asks four questions:

1. What is the AIF's fee and how is it set?
2. Is the policy nonassessable, and what happens to the dividend or savings distribution?
3. How much of the exchange's surplus is surplus notes, and who holds them?
4. Who sits on the subscribers' advisory committee, and is it independent of the AIF?

The answers decide whether the lower price is a real advantage or a start-up pricing choice that may not last. Premiums here are invented for illustration, not market prices.

What to check before you buy

• The AM Best rating letter. Look for the financial strength rating, the outlook, the balance sheet assessment and the discussion of surplus notes and reinsurance. See AM Best ratings explained for business buyers.
• Who the AIF is, who owns it and how it is paid.
• Whether the exchange is admitted in your state. If it is, the guaranty fund backs it; if it writes on a surplus lines basis, it generally does not. See what happens when an insurer fails: guaranty funds and business policies.
• Reinsurance dependence. Heavy use of reinsurance is common in start-ups; ask how the program renews.
• Your rights as a subscriber: any dividend, savings account, assessment terms and voting rights in the subscriber's agreement.

For a broader approach to judging a carrier, read how to judge a business insurance company.

Key takeaways

• A reciprocal exchange is a policyholder-owned insurer run by an attorney-in-fact under a power of attorney, with oversight by a subscribers' advisory committee.
• The attorney-in-fact's fee, often a percentage of premium (up to 25 percent at ERIE), is the main governance issue; the NAIC working group is drafting rules that would require fair and reasonable fees.
• New exchanges often start on surplus notes; AM Best counted 27 formed from 2017 to 2024, 14 of them in Florida.
• An admitted exchange is regulated and backed by guaranty funds like other insurers; check whether the policy is nonassessable.
• Judge the exchange by its rating letter, capital, reinsurance and fee terms, not by the label.