In a Reciprocal Exchange, profits and losses are allocated based on what factor?

• A. The number of insured lives
• B. The time insured
• C. The amount of insurance purchased by that member
• D. The member's claim history

Answer: (C)

In a Reciprocal Exchange, profits and losses are shared in proportion to each member’s exposure in the pool, which is represented by the amount of insurance they hold. Since there are no stockholders and the pool is funded by member premiums, each subscriber’s stake—and thus their share of any profit or loss—depends on how much coverage they own. The more insurance a member purchases, the larger their share of the pool’s gains or losses. Time insured or claim history isn’t used to determine allocations, and the number of insured lives isn’t the best measure because one large policy can represent far more risk than several smaller ones.