Reciprocal exchange

A reciprocal exchange is a form of insurer in which each policyholder, called a subscriber, agrees to insure the other subscribers. In effect you become both an insured and a very small insurer. The exchange itself is not a corporation with a board of directors answering to shareholders. A separate firm called an attorney-in-fact manages it under a power of attorney that each subscriber signs.

The attorney-in-fact handles the business: marketing, underwriting, issuing policies, adjusting claims and investing. It is paid a management fee, usually a percentage of premiums. Erie Indemnity, which manages the Erie Insurance Exchange, reports in its recent annual filings a fee capped at 25% of the exchange's premiums. Surplus belongs to the exchange and its subscribers, not to the manager. USAA and the Farmers and Erie exchanges are reciprocals.

The structure resembles a mutual, but with a twist: the manager often is a profit-making company with its own owners. That can create tension over fees and expenses, which regulators review. For a homeowner, the practical test is the same as for any insurer: the exchange's financial strength rating, claims record and your state's complaint data. The legal form tells you little about price or service.

The reciprocal exchange guide covers how they work, and the ownership comparison puts them next to the other types.