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.

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.

ALIRT Scores; RIE Model Characteristics

ALIRT Insurance Research is an independent financial analysis firm that specializes in monitoring insurance company solvency and performance trends for institutional clients. Based in Hartford, Conn., ALIRT provides analytical insights that assist organizations in managing insurance company exposure and maintaining fiduciary oversight.

For the benefit of its distribution clients, ALIRT currently follows all 72 insurers that its analysts identified as RIEs as of year-end 2024, and the RIE Overview Report includes a table listing all 72 companies along with their surplus and risk-based capital ratios based on statutory data, as well as their recent ALIRT scores.

ALIRT analyzes financial data to develop its scores, which can range from 0-100. Higher scores indicate stronger companies. Operational and investment metrics have the greatest impact on the score, while the remainder of the ALIRT analysis focuses on financial flexibility at the holding company level as well as the impact of credit ratings assigned by Moody’s, S&P, Fitch and AM Best.

Also included in the report is a graph comparing median ALIRT scores for the RIE composite to median scores for personal lines and commercial lines composites for each year from 2020 through 2024, and for 2025 through six months.

The line graph comparison shows RIE scores well below ALIRT’s commercial and personal lines composite scores and toward the bottom of ALIRT’s statistically normal score range (over the past 25 years) of 39-61. Specifically, the personal lines scores have ranged from a little below 50 (in 2022) to a high of 65 in 2025, while the RIE composite scores hover between 40 and 45 for all years. In addition, at year-end 2024 there were eight RIEs that reported ALIRT Scores below 30, a threshold which generally indicates very poor financial performance and an increased likelihood that a carrier is headed for some type of near-term remedial action (possibly regulatory intervention or insolvency).

Although the bulk of any P/C insurer’s ALIRT score is attributable to its operating and investment performance, Cheney notes in the report that the low scores for some RIEs may also partially reflect smaller company size and lack of credit ratings.

Of the 72 RIEs scored, 40 are currently unrated by AM Best or any other major rating agency. (Editor’s Note: While many RIEs are rated by Demotech, ALIRT considers Demotech to be a secondary rating agency.)

With respect to size, the report describes a financially bifurcated landscape. “While the largest exchanges—such as USAA and Farmers—maintain strong capitalization and conservative operations, smaller and newer RIEs often face pressure from volatile underwriting results,” ALIRT said in a media statement.

Still, there are exceptions, the report says, noting that a handful of the largest RIEs ranked by premium volume that have ALIRT scores below 45, including Texas Farm Bureau Underwriters – A Reciprocal, Tower Hill Insurance Exchange, SureChoice Underwriters, and Kin Interinsurance Network.

Beyond size, the ALIRT report describes characteristics of the RIE market, providing breakdowns by predominant line of business, region and distribution channel.

In general, the RIE market is “top heavy,” with the top five players reporting 70 percent of RIE direct premiums written, and just five more writing over $1 billion. This top heaviness skews the average premiums volume of RIEs to $700 million, while median volume is only $58 million.

RIEs tend to be regionally focused, with 53 of 72 writing at least 70 percent of premium in a single region—23 of those in the South, and 18 of those 23 formed since 2017.

Separately, ALIRT identified 41 RIEs that have merged, become insolvent or otherwise ceased operations over the years, 31 since 2000. According to the report, however, no RIEs ceased operations in 2024.

Reflecting on the current environment, the report strikes a cautiously optimistic tone. “Legal reforms in Florida and Louisiana, along with a stabilizing reinsurance market, are expected to provide some relief to newer RIEs navigating these challenging markets,” ALIRT says.

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Understanding the ALIRT Scores

• ALIRT scores, based on an analysis of financial data, can range from 0-100, with the higher score indicating stronger relative strength of a company.
• Over the past 25 years, median scores for P/C companies have tended to fall between 39 and 61.
• Traditionally, scores below 30 indicate that a carrier is headed for some type of near-term remedial action.
• Unlike letter ratings assigned by credit rating agencies, ALIRT scores are recalculated each quarter based on statutory financial information.
• ALIRT scores are calculated for individual insurance companies with insurance groups—the names behind the policy paper—rather than parent companies.
• The ALIRT analysis looks at four tiers of risk, with the first two tiers—operational risk and investment risk—accounting to 75 percent of the score.
• The remaining tiers look at the financial flexibility at the holding company level as well as the impact of credit ratings (assigned by Moody’s, S&P, Fitch and AM Best).
• The biggest components of the operation risk score are underwriting profitability, capitalization and reserves.