Reciprocal Exchanges: The Original P2P Insurance Model That Benefits Everyone
A corporate structure says a lot about an insurtech’s vision — and how willing it is to try something different.
When Kin became a full-stack insurance company in the summer of 2019, we had a choice to make. We were pivoting from an MGA because we wanted to control our destiny and own our customer experience from quote to claim. We needed a structure that would allow us to operate lean as we always have and that would benefit our customers the most.
That’s why we decided on the reciprocal insurance exchange — a less common company structure with considerable perks. If other insurtechs truly want to change the industry, they’d be wise to embrace it, too. Here’s why.
An Insurance Company Owned by Policyholders Benefits Everyone
A reciprocal insurance exchange is owned by its policyholders. Through their premiums, they insure other members in the exchange and share in the underwriting profits when there are few losses.
Take a minute to think about how cool it is to own a piece of the company that insures your home. Are you going to be sheepish about asking for help from a company you have a personal stake in? Are you going to make a fraudulent or questionable claim?
Having a stake in your insurer changes your behavior and incentives considerably to the benefit of everyone involved.
The reciprocal exchange is the original peer-to-peer (P2P) insurance model where policyholders serve as the insurer and the insured. It got its start back in 1881 when dry-good merchants in New York finally got fed up with overpaying to insure their buildings (sound familiar?). They pooled their money together to self-insure each other as a way of avoiding the bureaucracy, inefficiency, and poor service that plagued the insurance sector even then.
The reciprocal exchange is the original peer-to-peer (P2P) insurance model.
While some insurtechs like Lemonade have famously claimed to be a P2P insurance company, they’re not — they’re a stock insurance company owned by stockholders. That means they work for shareholders, not policyholders.
By contrast, customers are literally the center of a reciprocal insurance company, making the structure customer-centric by design. The company isn’t incentivized to raise prices to increase profits, which helps keep premiums low. Plus, reciprocal exchange policies are non-assessable, meaning policyholders aren’t charged more if operating costs are higher than anticipated.
In addition to sharing in underwriting profits, policyholders get a voice in what the company does, so the company and customers’ interests are fully aligned, full stop.
And the customer satisfaction shows. Kin and USAA are both structured as reciprocal exchanges and enjoy some of the highest NPS scores in the industry: 84 and 77, respectively.
We can’t speak for everyone, but homeowners are the reason we set out to change homeowners insurance. For us, it made sense to choose a structure that puts them first.
Customers are literally the center of a reciprocal insurance company.
Reciprocal Exchanges Are Efficient & Financially Stable
Reciprocal exchanges are also more stable than stock insurance companies.
When a customer signs up with a reciprocal exchange, they may pay a small surplus contribution, which adds to the carrier’s surplus to provide a bigger cushion for the insureds.
Unlike a stock insurance company, reciprocal exchanges aren’t under pressure to pay dividends to investors every year. Instead, they can accumulate that money as additional surplus or pay it back to the policyholders.
Lastly, the owners of stock insurance companies have an incentive to make risky investments because they are allowed to keep the return from those investments. It’s a structure that can make the owner extraordinarily rich, like Warren Buffet, and also one that encourages fraudsters to game the system, as did Greg Lindberg, who was recently convicted of bribing North Carolina’s insurance commissioner. Lindberg was able to use the balance sheet of an insurance company he controlled to invest in his affiliated companies, ultimately diverting $2 billion to expand his private holdings.
Stock insurance companies also make money when claims are low because they can pocket whatever is leftover.
A reciprocal eliminates both of these outcomes. Investment gains are either returned to policyholders in the form of lower prices or are paid out directly. And because the goal is to break even between premiums and losses, reciprocals don’t have incentive to skimp on claims.
Given that the ability to pay claims is the entire point of an insurance company, we knew the reciprocal was right for us. We needed a structure that is self-sufficient and financially stable so we can always keep our promise to our customers.
A Tried & True Structure Fit for the Future
While few insurtechs currently take advantage of the peer-to-peer insurance structure, we’ve seen firsthand that its customer-first design and efficiency are key to helping us maneuver quickly in a historically cumbersome industry. We wouldn’t be surprised if more insurtechs follow suit and take on this structure to best serve customers and their vision for the future of insurance.
About the Author
Sean Harper is the CEO and co-founder of Kin Insurance, an insurance technology company and home insurance carrier built to make insurance easy, efficient, and affordable. Previously, Sean founded FeeFighters, a payments company bought by Groupon, and TSS-Radio, an ecommerce company that became an Inc. 500 fastest-growing company. Before becoming an entrepreneur, Sean was a consultant at the Boston Consulting Group and an investor at Longworth Venture Partners. He holds an AB from the University of Chicago, where he studied economics and computer science, and an MBA from the University of Chicago Booth School of Business.
