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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!
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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