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What is a reciprocal insurance exchange?

Reciprocals have been around for many years, but are often sought after by more popular types of insurance, especially mutual insurance companies (Nationwide, Liberty Mutual) and stock insurance companies (Allstate, Geico, AIG). However, in recent years there has been a surge in interest in reciprocal insurance, especially as more nonprofit groups seek the best means of insuring their members without generating taxable income.

So what are reciprocals? Reciprocals are generally defined as a group of individuals, corporations, or entities who, as members, agree to exchange insurance contracts (policies) and share their insurance risks with each other within their select group. Each member (insured) of a reciprocal exchange individually designates and authorizes a common attorney-in-fact to manage the affairs of the exchange. Therefore, they are similar to mutuals except that the people who administer the policies are not employees of the company, but these “proxies” who manage the reciprocal finances and take care of the underwriting, claims management, investments and any other day. a day. operations. In fact, the attorney is generally paid a percentage of the total earnings for his service.

Reciprocals also have a “subscriber advisory committee” (SAC), which is essentially a board of directors. Like the proxy, the underwriters designate the body of people to become the SAC. The SAC has general responsibilities for the finances and insurance activities of the recipient. For example, the attorney’s compensation in fact will generally be determined through periodic negotiations with the SAC.

In terms of tax advantages, all insurance companies, including reciprocal ones, are considered partnerships with respect to federal income tax. This means that the insurance company is subject to the double tax that applies to most corporations. Therefore, income is taxed once at the corporate level and taxed again when distributed to the shareholders of the company. However, reciprocals have a unique tax advantage over other insurance companies in that they are allowed to take a deduction for the amount of their annual net income that is allocated to the underwriter’s SSAs. (Savings account for subscribers).

What is a subscriber savings account? At the end of each year, the remaining premium will be deposited into the Subscriber Savings Account, which is held in the name of each active member. The company generally does not pay taxes on money deposited into SSA accounts, which allows excess balance to accumulate faster than retained earnings at a typical insurance company.

The reciprocal insurance structure has been used by groups of professionals, including doctors, lawyers and architects, and some industries, including pharmaceutical manufacturers, when the coverage they need has become scarce and with extremely high prices.

Although the reciprocals represent a smaller number of insurance companies, they are a viable option and should not be overlooked when looking for the right coverage for your specific needs.

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