Homeowners in the South are increasingly buying property insurance from an obscure type of insurer that some experts and officials say might lack the money to pay all claims after a highly destructive storm.
The insurers are a type of cooperative owned by policyholders and are growing in hurricane-prone states such as Florida, Louisiana and Texas, where traditional insurance companies are withdrawing from risky areas.
At least 36 “reciprocal” insurance exchanges have formed since 2017, half of them since 2024, according to Alirt Insurance Research, a market-intelligence group.
But the growth has brought warnings that the exchanges are often small and could lack adequate financial reserves.
“One of the biggest drawbacks” of buying insurance from an exchange, Louisiana Insurance Commissioner Tim Temple wrote in a consumer advisory, “is the potential difficulty to generate the necessary funds to offset costs.”
“Newer reciprocals with fewer members may not be able to support coverage needs,” Temple added.
Doug Heller, director of insurance at the Consumer Federation of America, warns that states like Florida and Louisiana are trying to fix their insurance markets by encouraging smaller insurers including exchanges whose policyholders might think are more financially secure than they actually are.
Reciprocals offer “a structure that can be workable and serve its purpose, but it’s also one that’s ripe for manipulation and abuse,” said Heller.
Reciprocal insurers are not companies, but formalized agreements among parties who dislike insurance options available on the market. The parties collectively decide to insure one another and hire a manager to run operations.
Reciprocal insurers are legal and subject to the same state regulation as other insurers. They were created in the 1880s and today some of the largest are run by major insurers such as Farmers and USAA.
But a recent surge has gotten regulators’ attention. Reciprocals collectively wrote about $51 billion in premiums in 2024, roughly 55 percent more than they wrote in 2019, according to the National Association of Insurance Commissioners. The association created a working group this year to study the exchanges.
The growth is a “reaction to market conditions” as large insurers find it less profitable to do business in coastal, vulnerable states, said David Blades, an associate director with rating agency AM Best.
Extreme-weather events, inflation and other factors have caused upheaval in many state insurance markets. Repeated natural disasters in some coastal states have prompted many large insurers to pare their business to reduce their risk.
Their withdrawal has made insurance more expensive and harder to get, especially in climate-exposed areas.
It also has fostered opportunity for lesser-known parts of the insurance industry.
After pullouts and insolvencies by Florida insurers in the early 2020s, the state enacted a group of pro-industry laws in 2022. Florida officials say the new laws have attracted 17 new insurers to the state.
They include Stand Insurance and Praxis Reciprocal, which are organized as reciprocal exchanges. Florida authorized both to take 25,000 policies from Citizens Property Insurance Corp., the state-chartered insurer that’s required to sell insurance to those who can’t get it elsewhere.
Citizens was until recently Florida’s largest property insurer. Gov. Ron DeSantis (R) says devolving policies to the private market is a priority.
The Florida Office of Insurance Regulation scrutinizes reciprocals as it does other types of insurers and “does not have a preference” for a company’s structure as long as it follows state law, office spokesperson Shiloh Elliott said in an email.
In Louisiana, eight reciprocal insurers have formed since 2021, said John Ford, a spokesperson for the Louisiana Department of Insurance. He said the department has not heard major complaints.
Additional concerns about management fees
Reciprocals emerged in the late 19th century as a way for small, hard-to-insure groups of people to create their own private insurance pool. The first was formed by a group of New York City merchants, who were early adopters of fire sprinklers in their facilities but felt private insurers were not offering sufficient discounts for the equipment.
Reciprocal members collectively decide what kind of insurance they want and how to finance it. The members establish a shared loss reserve and adopt rates that they think are sufficient to pay claims.
If members judge the reserve is insufficient, they can raise rates on themselves or raise money from an external partner.
The members hire an outside manager to administer their agreement.
The benefits: bespoke insurance with minimal administrative cost.
“It’s almost always somebody looking for less expensive insurance or just to get insurance that they otherwise couldn’t obtain,” said Brian Bolash, senior vice president at Erie Indemnity Co., which manages the United States’ third-largest reciprocal insurer, Erie Insurance Exchange. Bolash was speaking in an October event hosted by the insurance commissioners’ association.
But the model also presents different risks than does traditional insurance.
One is financial. The largest reciprocal insurers, such as USAA and Farmers, have built cash reserves over decades of operations that can cover a large or unexpected number of claims.
Smaller, newer reciprocals typically have not built up a large cushion, and until they do are at a risk of facing claims that exceed their ability to pay, the AM Best rating agency wrote in a November report.
In 2024, Florida dissolved the American Mobile Insurance Exchange, a reciprocal focused on mobile and manufactured homes, after the insurer said it had lost $15 million over a three-year period, depleting its financial reserve.
Roughly 30 exchanges have ceased operations since 2000, highlighting the risks especially for smaller insurers, said Alirt.
Marc Ragin, a professor of risk management at the University of Georgia, said by email that reciprocals “aren’t necessarily riskier” than other types of insurers but they have “fewer financing options if the company needs external funding.”
A second risk is structural. The insurance commissioners’ association is focused on the fees exchanges pay their managers, called attorneys-in-fact.
In addition to premiums, exchange members pay an additional charge to the management company — usually a percentage of premiums.
Some insurance regulators say it’s difficult to judge if the fees are “fair and reasonable,” one yardstick commonly used to judge transactions in the insurance business.
Excessive fees raise the risk that a managing company is draining financial strength from an insurance entity that its customers are counting on, said Heller of the Consumer Federation of America.
Some state regulators want to clarify in law that these fees are subject to review for their fairness and reasonableness. Regulators will consider a model law at a commissioners’ association meeting in Florida next month.
