In the wake of traditional insurers pulling back from high-risk areas, homeowners in hurricane-prone states like Florida, Louisiana, and Texas are increasingly turning to an obscure type of insurer known as a “reciprocal exchange.” However, experts are raising concerns about the financial stability of these newer, smaller insurers, particularly following a major storm.
A reciprocal exchange is a cooperative insurance model where policyholders, or members, collectively agree to insure one another, managing their own risks and coverage. This structure has gained popularity in coastal regions where traditional insurers are retreating due to the growing risk of extreme weather events. Since 2017, at least 36 reciprocal exchanges have been established, with half of them formed in 2024 alone, according to Alirt Insurance Research.
While reciprocals offer an alternative to traditional insurance, regulators have warned that these exchanges often lack the financial reserves necessary to handle large-scale claims. Louisiana Insurance Commissioner Tim Temple highlighted that these organisations might struggle to generate the necessary funds to cover claims after a major disaster. He noted that newer reciprocals with fewer members may be particularly vulnerable.
In response to the market challenges posed by natural disasters, some states have passed laws encouraging smaller, alternative insurers, including reciprocal exchanges. In Florida, for example, new laws introduced in 2022 have brought in 17 new insurers, including several reciprocal exchanges like Stand Insurance and Praxis Reciprocal.
However, experts like Doug Heller, director of insurance at the Consumer Federation of America, warn that while these insurers may appear financially stable, they are often less secure than consumers realise. “Reciprocals offer a structure that can be workable, but they’re also ripe for manipulation and abuse,” Heller said.
Risks and Structural Concerns
The rise of reciprocal exchanges has raised concerns about both financial stability and management practices. While larger reciprocal insurers, such as USAA and Farmers, have built substantial cash reserves over decades, many newer reciprocals have not accumulated the necessary funds to cover substantial claims. AM Best, a global credit rating agency, has warned that these newer exchanges could face significant financial strain if a major claim exceeds their reserves.
In Florida, the American Mobile Insurance Exchange, a reciprocal insurer for mobile and manufactured homes, was dissolved in 2024 after losing $15 million over three years, depleting its financial reserves. Since 2000, around 30 exchanges have ceased operations, underscoring the risks for smaller insurers.
Another concern involves the management fees paid to the outside managers—known as attorneys-in-fact—who run reciprocal exchanges. Members of these exchanges pay premiums plus an additional fee, often a percentage of the premiums, to the manager. Some regulators are concerned that these fees may not be “fair and reasonable” and could drain the financial strength of the exchange, leaving members vulnerable.
As the use of reciprocal exchanges continues to grow, insurance regulators are looking to address these risks. In response to concerns over management fees, the National Association of Insurance Commissioners plans to review a model law next month to ensure that such fees are subject to proper scrutiny.