Reciprocal Exchange characteristics: Which statement is true?

• A. It is funded by premiums paid into a central pool without sharing losses
• B. Profits go to the company
• C. When each member is both insurer and insured, profits and losses are shared among members according to the amount of insurance purchased by that member
• D. It insures only one class of risk

Answer: (C)

Reciprocal exchanges are a mutual, member-driven form of insurance where policyholders insure one another. Premiums paid into a common pool are used to pay claims, and the people who buy coverage are also the ones who share in the financial outcomes of that pool. The managing structure is typically an attorney‑in‑fact who administers the operation for the subscribers.

The key point is that, because each member acts as both insurer and insured, profits and losses come back to the members themselves and are allocated in proportion to the amount of insurance each member purchased. If there’s a surplus from underwriting, it tends to be distributed back to the members (often as dividends or premium credits) rather than going to a separate company or stockholders.

That’s why the statement stating that profits and losses are shared among members according to the amount of insurance purchased is the true characterization. The other options don’t fit because: profits don’t go to a separate company, losses aren’t borne by a central non-sharing pool, and reciprocal exchanges aren’t limited to a single class of risk; they can cover multiple lines of business.