Insurance Broker Certification Practice Exam

Which type of insurance is founded on mutual agreements among subscribers?

1. Insurance Exchange

2. Reciprocal insurance

3. Multilateral insurance

4. Cooperative insurance

The correct answer is: Reciprocal insurance

Reciprocal insurance is based on mutual agreements among subscribers, where a group of individuals or entities agree to share the risks among themselves. This form of insurance operates under a system of interdependence, where each subscriber contributes to a pool that is used to cover claims made by any member of the group. Each subscriber acts as both the insurer and the insured, facilitating a sense of shared responsibility and community among the members. In this structure, subscribers appoint an attorney-in-fact to manage the premiums, claims, and overall administrative tasks. This setup fosters cooperation and allows members to benefit from more stable and potentially lower premiums than those available in traditional insurance models. The nature of reciprocal insurance emphasizes collaboration and the collective management of risk, distinguishing it from other forms of insurance. The other types of insurance mentioned have different foundation and operational models. For instance, insurance exchanges involve transactions between various insurance providers and consumers without the same mutual agreement aspect. Additionally, cooperative insurance typically focuses on groups coming together for a common goal, but the underlying mechanism is not strictly the reciprocal sharing of risk like in reciprocal insurance. Multilateral insurance does not specifically relate to mutual agreements among subscribers and lacks the direct community aspect present in reciprocal insurance.