Reciprocal insurance exchanges (RIEs) are experiencing a resurgence, driven by growing third-party investor interest in the fee-for-service businesses that manage these exchanges and by limited property insurance capacity in catastrophe-prone areas.
Rick Cheney, senior analyst at ALIRT and author of the October report Overview of Reciprocal Insurance Exchanges and Recent Market Trends, notes that investors benefit from steady fees without being directly exposed to underwriting or investment risk.
How RIEs Work
Unlike stock or mutual insurers, RIEs are unincorporated insurance entities owned by policyholders, or “subscribers.” These subscribers appoint an attorney-in-fact (AIF) to manage the exchange’s operations. AIFs can be owned by managing general agents (MGAs), public or private organizations, individuals, the RIE itself, or other insurers.
This structure offers capital flexibility but can create a potential misalignment between policyholders and investors. Third-party investors often earn fees from the AIF and its distribution network, typically MGAs or MGUs, while being insulated from underwriting losses.
Insights from the Market
Terrence McLean, CEO of SageSure, an MGA focusing on catastrophe-prone coastal regions, observed that investors and banks often treat RIEs differently than stock companies. While the regulatory and capital profile is similar, investors see revenue flowing into the AIF as fee-based, which can make the model more attractive from a risk standpoint.
ALIRT’s report highlights that property capacity shortages—especially in Florida, Texas, and Louisiana—have fueled a surge in RIE startups. Between 2017 and 2025, ALIRT identified 36 new RIEs, 18 of which launched in the last 21 months alone, primarily focusing on homeowners coverage in hurricane-prone areas.
“Reciprocal insurance exchanges are once again stepping in to fill coverage gaps in high-risk property markets,” Cheney said. “Their growth underscores both the innovation and financial vulnerabilities inherent in these regions.”
Capital and Investor Dynamics
Many new RIEs rely on surplus notes—essentially regulatory-counted debt backed by investors such as private equity, hedge funds, and ILS investors. These investors hope RIE operating earnings will repay the surplus notes over time. ALIRT warns that this setup may create “moral hazard,” as investors earn management fees without direct exposure to underwriting losses.
Financial Performance: ALIRT Scores
ALIRT tracks all 72 RIEs operating as of year-end 2024, providing scores ranging from 0-100 based on operational, investment, and financial metrics. Scores under 30 signal a heightened risk of regulatory intervention or insolvency.
- Median RIE scores from 2020-2024 hover between 40 and 45, below typical personal and commercial lines benchmarks of 39-61.
- Eight RIEs scored below 30 at year-end 2024, indicating very poor financial performance.
- Forty of the 72 RIEs are unrated by major agencies, with smaller size often contributing to lower scores.
Despite these challenges, the largest RIEs—such as USAA and Farmers—maintain strong capitalization and conservative operations.
Market Structure and Trends
- The RIE market is “top-heavy”: five insurers account for 70% of direct premiums, while median premium volume is only $58 million.
- RIEs are often regionally focused; 53 of 72 write at least 70% of premiums in a single region, mostly in the South.
- Since 2000, 31 RIEs have merged, gone insolvent, or ceased operations, but none closed in 2024.
Legal reforms in Florida and Louisiana, along with stabilizing reinsurance markets, are expected to support newer RIEs navigating these high-risk areas.
Understanding ALIRT Scores
ALIRT scores are recalculated quarterly from statutory financial data and focus heavily on operational and investment risk (75% of the score). Key drivers include underwriting profitability, capitalization, and reserves. Scores provide a detailed measure of insurer strength, complementing traditional rating agency letters.
In essence, while RIEs are innovatively filling gaps in high-risk property markets, their financial performance varies widely, and new entrants must navigate both market and structural risks.
If you want, I can also create an even more reader-friendly, “story-style” version that explains why RIEs are back in fashion using real examples and trends, without losing the ALIRT data and technical context.