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What is a "Reciprocal" or "Reciprocal Risk Retention Group?"

 

This brief article was contributed by Ken Carlton from Milliman. Visit their information-rich website today!

Milliman website

Some domiciles allow risk retention groups to be formed as reciprocals. A reciprocal risk retention group is an unincorporated association of individuals or entities that exchange contracts of insurance through an attorney-in-fact, which acts as an agent or manager. In a reciprocal, profits (including investment income) and losses are allocated back to each member's subscriber savings account. Essentially all income (and the related income tax) reverts back to the members. Thus, the reciprocal structure may provide a tax advantage to groups whose members are non-profit entities.

An attractive feature of reciprocals is that new policyholders can join in a way that is fair to both them and long-standing policyholders because of the way profits and surplus contributions are accounted for. Reciprocals can also be more flexible because each one is different, based on the membership agreements and bylaws. Reciprocals are governed by a few basic provisions, so management is free to be creative and draft agreements that fit its particular purpose.

 

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