Why Reciprocal Insurance Exchanges Are Back in Fashion

  Reciprocal insurance exchanges have been increasingly popular in recent years, with third-party investor interest in the fee-for-service businesses that manage RIEs and waning property insurance capacity in catastrophe-prone regions supporting the resurgence.

Third-party investors “are not exposed to the insurers’ underwriting and investment performance but rather derive steady fee income from operating the attorney-in-fact” of a reciprocal exchange, observes Rick Cheney, senior analyst at ALIRT and author of the late-October report, “Overview of Reciprocal Insurance Exchanges and Recent Market Trends.”

ALIRT’s new report explains that RIEs are unincorporated insurance entities owned by policyholders, or “subscribers.” Distinct from stock or mutual insurers, RIE policyholders share directly in profits and losses and appoint an “attorney-in-fact” (AIF) to manage operations.

Read more about RIE structures: Unique Structure of Reciprocal Insurance Exchanges Offers Release Valve on Pressurized Markets and A Look at Reciprocal Insurers From 30,000 Feet

AIFs can be owned by managing general agents and underwriters, public or private organizations, individuals, the reciprocal itself or other insurance companies, Cheney’s report explains.

This model allows capital flexibility but can also create risk misalignment between policyholders and investors. Since an RIE is owned by the policyholders, “this ‘walls off'” the investors who own the attorney-in-fact, Cheney wrote in the report, also noting that third-party investors are increasingly also deriving fee income from the RIE’s distribution source—usually an MGA or MGU.

An MGA Weighs InTerrence McLean, CEO of SageSure, an MGA specializing in placing insurance in catastrophe-prone coastal regions, recently spoke to Carrier Management about three RIEs that SageSure sponsored in the past four years.Asked for his take on the surge in RIE launches generally, McLean said he believes “investors and banks are treating the reciprocal model differently than they would a stock company equivalent.”“The value of the balance sheet from a regulatory capital or a rating agency capital perspective is effectively the same,” he said. While running an RIE, the AIF “has access to managing the capital the same way you would in a stock company.”“But investors and lenders look at it somewhat differently. It’s questionable whether they should, but they definitely factually do. [And] if they do, the model is better because they think of the revenue and the earnings going into the AIF as fee-based revenue.”Related: How One MGU Grew Fivefold When Capacity Fled Cat-Prone Property Markets

The ALIRT report, which flags property capacity shortages—in U.S. southern coastal states, in particular—as a factor driving a surge in RIE startups, provides an in-depth assessment of the structural evolution, financial performance and outlook of RIEs in the U.S. property/casualty insurance market.

According to the research report, 72 companies were operating as pure RIEs as of year-end 2024. Between 2017 and 2025, 36 new RIEs were formed by ALIRT’s count.

Focusing on the most recent cohort, 18 of the 36 newest exchanges were formed in just the last 21 months—from early 2024 through the first nine months of 2025—with most of these specializing in homeowners coverage in hurricane-prone regions such as Florida, Texas and Louisiana.

“Reciprocal insurance exchanges are once again stepping in to fill coverage gaps, this time in high-risk property markets,” Cheney said in a media statement announcing the publication of the report. “Their growth underscores both the innovation and the financial vulnerabilities that come with insuring catastrophe-exposed regions.”

“The sustainability of this trend may well depend on the success of the RIEs that have formed in the last few years. If these insurers struggle, it may hinder the flow of capital to new entities, pressuring both policyholders and insurance companies in these coastal property markets,” the report says.

The ALIRT analysis also notes that many of the newly formed RIEs have been supported by capital infusions in the form of surplus notes—essentially debt that is counted as surplus because insurance regulators may preclude payments of interest and return of principal when the company is in financial distress. ALIRT reports that these surplus notes are often backed in part by investor groups—private equity firms, hedge funds and ILS investors, for example—as well as by MGAs.

These investors groups “are banking on these RIEs to generate sufficient [operating] earnings over time to pay down these surplus note investments,” the report suggests.

ALIRT warns that the increasing role of private investors and MGAs in supporting new RIEs through surplus notes “could introduce ‘moral hazard’ dynamics, as external investors may be less exposed to underwriting losses while still profiting from management fees.”

“ALIRT’s concern with these new startups turns, to a degree, on the concept of ‘playing with other people’s money.’ In short, with less investor/manager funds tied up in these insurers, there may be an incentive to opportunistically generate premium in difficult property insurance markets. This is especially true where these interests are generating fees based, in part, on overall premium volume,” the report says.