A hardening of traditional insurance markets and market dislocations have led to the rise in newly established reciprocal insurance exchanges, particularly in catastrophe-exposed homeowners’ insurance markets, according to a new AM Best report.

Reciprocal exchanges historically have been present in segments such as personal auto. Escalating natural catastrophe losses and mounting reinsurance costs have compelled established insurers to pull back capacity, aggressively raise rates or simply cease writing certain risks in certain markets, leaving policyholders and specialized managing general underwriters to actively seek alternative solutions. These dynamics have resulted in a proliferation of reciprocals in the U.S. property/casualty industry.

According to the Best’s Market Segment Report, “Reciprocal Insurance Exchanges Represent a Unique and Collaborative Structure,” reciprocals’ capital structure and unique operating characteristics have helped them gain popularity in catastrophe-prone states such as Florida and Louisiana, which have faced numerous weather-related challenges and copious claims activity in the last 10 years.

“Reciprocals offer a compelling answer to these market gaps due to their unique member-owned structure, whereby members are ‘subscribers’ and take on a dual role as the insured and the insurer,” said Alexander Winant, associate analyst, Industry Research and Analytics, AM Best. “A key advantage of the reciprocal exchange model is the increased control subscribers exert over aspects like rates, strategy and administrative overhead, all of which directly aligns the interests of the insurer and the insured since they are the same party.”

The report notes that fledgling reciprocals have been focused on lines of coverage encountering tumultuous conditions in specific states experiencing volatile results, particularly in property lines. Of the 27 reciprocals formed in 2017-2024, 14 are in Florida, followed by four in Texas and two in Louisiana. From 2022 through 2024, the direct premium volume of these 27 reciprocals increased by 83%, and of the 14 companies writing Florida business predominantly, the lead line of business for 11 of them is homeowner’s multiperil.

AM Best assesses all rated insurance company formations, including reciprocal exchanges, using its core pillars: balance sheet strength, operating performance, business profile and enterprise risk management. Most rated reciprocals have a balance sheet strength assessment in the very strong category, with new formations mostly on the lower end of that category due to substantial dependence on surplus notes. As these reciprocals mature organically and rely less on surplus notes, there is potential for these companies to improve to the higher end of the very strong balance sheet strength assessment.

“The rapid rise of these newer, often less seasoned, reciprocals underscores the critical importance of execution risk and leads rating analysts to meticulously monitor actual results against initial projections and thoroughly review business plans, initial capitalization strategies and the robustness of reinsurance programs,” said David Blades, associate director, Industry Research and Analytics, AM Best.

Reciprocals are likely to have a continued vital role in providing capacity in challenging segments, particularly in coastal property, and their sustained success hinges on effectively managing severe catastrophe events, appropriately managing expenses and maintaining strong financial health under heightened oversight.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=359763.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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