Life & Health Insurance Practice Exam

Which type of organization is formed where all members insure one another?

1. Stock Insurance Company

2. Reciprocal Insurer

3. Reinsurer

4. Risk Retention Group

The correct answer is: Reciprocal Insurer

A reciprocal insurer is a unique type of organization where members mutually agree to insure one another. In this arrangement, each member, or subscriber, contributes to a common fund from which claims are paid. Essentially, they pool their resources together to provide coverage for risks faced by all participants. This cooperative model allows members to share both the costs and the benefits of insurance, which can lead to potentially lower premiums compared to traditional insurance models. Reciprocal insurance operates on the principle of mutual assistance and is governed by specific rules and regulations. The management of the reciprocal is typically handled by an attorney-in-fact, who acts on behalf of all members. This structure enhances trust and accountability among members since they are collectively invested in each other's coverage and risk management. While other options, such as stock insurance companies and risk retention groups, focus on profit-driven models or group aggregation for specific risks, they do not embody the same mutual insurance ethos as reciprocal insurers. Reinsurers, on another note, provide insurance to insurance companies rather than to individual members, further distinguishing them from the reciprocal model.