The reciprocal exchange - A better approach to insurance

Insurance companies are organized differently. Most are structured based on stock or mutual models. The reciprocal exchange is a lesser-known model that provides many unique advantages to its eligible members.

A reciprocal exchange is an unincorporated insurance entity (commonly known as an “exchange”) owned by its members (policyholders) instead of stockholders or other investor owners. The insurance exchange is managed for the benefit of the members by a third party known as an Attorney-in-Fact. The Attorney-in-Fact handles the exchange’s daily operations, including issuing policies, processing claims and managing the professional staff needed to run an insurance entity. The membership elects a group of members called the Subscriber’s Advisory Committee to provide oversight of the Attorney-in-Fact on behalf of the members of the reciprocal exchange.

Armed Forces Insurance Exchange (AFIE) operates as a reciprocal exchange. AFIE was the first reciprocal exchange created in the state of Kansas. Our members have long understood the benefits of helping each other toward the common goal of serving and protecting our military community.

Benefits to our members

Our reciprocal exchange model allows AFIE to focus all our efforts and resources on our members. Our members own the Exchange. So, without the need to charge policyholders extra premiums to fund investor returns, our focus is on keeping premiums fairly priced based on our members’ losses, along with providing excellent service to our members. Our goal is to do what is in the best interest of our membership and provide the best value for your unique insurance needs.

Subscriber Capital Accounts and surplus contributions keep premiums lower and provide additional benefits to Armed Forces Insurance Exchange members.

AFIE membership is restricted to active duty and veteran armed services members, Department of Defense and Veterans Administration employees, their children and parents. Our focus on military-based membership allows us to monitor the needs of the military community and to create unique policy features in our insurance policies explicitly designed to meet the needs of our members. One of the benefits of AFIE membership is your Subscriber Capital Account or SCA. Your SCA is an account created for and held in your name while you have insurance with AFIE. A portion of the amount due from members each year and any excess AFIE profits1 are contributed to SCA accounts and represent members’ ownership of the Exchange. The SCA allows our exchange to operate more efficiently than simply charging a larger premium to our members.

Overall, the reciprocal exchange model provides distinct advantages in terms of service, products and a more efficient cost structure — all adding up to a better insurance value for members of the Armed Forces Insurance Exchange.

Surplus Contributions

Insurance companies require capital (or policyholder surplus) to maintain adequate reserves to protect and manage the risk of the policies issued. As a reciprocal exchange, the Armed Forces Insurance Exchange cannot issue stocks to raise capital and cannot seek capital from outside sources other than our owners — our members.

Each policy has a nominal amount added to the total to maintain sufficient policyholder surplus to support the policy being issued by that member. Each member’s surplus contribution is credited to that member’s SCA.

Subscriber Capital Accounts (SCA)

An SCA is created for and held in each member’s name while they have insurance with AFIE. It is non-interest and non-dividend bearing. Members cannot make withdrawals or deposits to or from their SCAs. Funds held in these accounts remain on AFIE’s balance sheet and are available to meet the financial obligations of the exchange2.

SCA and surplus contributions keep premiums lower and provide additional benefits to Armed Forces Insurance Exchange members.

SCA balances are fully vested after five years of continuing insurance coverage written through AFIE. If your coverage terminates and you cease being a member, your SCA will be returned to you, provided you have met the five-year vesting requirement. If your membership terminates with less than five years of continuous coverage, your contribution is forfeited and retained by AFIE. If you are vested and the balance in your SCA exceeds twice your annual policy premium, the amount in excess will be returned to you3.

AFIE Membership FAQs

  • Why is AFIE collecting a surplus contribution?

    Every insurance company requires capital to manage the risk of issued policies prudently. Unlike a stock insurer, AFIE is a reciprocal insurer. A reciprocal insurer is an organization in which members (subscribers) agree to exchange insurance contracts through a common attorney-in-fact to spread the risk associated with those contracts amongst all subscribers. This means that, by becoming a member, you gain a share in the company. Your surplus contribution is money set aside as working capital so that AFIE can build adequate reserves for long-term stability.

  • What are the benefits of collecting a surplus contribution?

    The funds generated from the surplus contribution and held within the SCA remain on AFIE’s balance sheet. They are available to AFIE to meet claim and expense obligations. The surplus contribution supports AFIE’s financial strength and lowers the cost of capital by reducing the reliance on other, more expensive forms of capital. Because these funds remain on AFIE’s balance sheet, they also help reduce premium costs.

  • How much is my required surplus contribution?

    Members are required to make a surplus contribution amount equal to 6% of their total premium on each policy issued by AFIE.

  • Will the surplus contribution rate be subject to change?

    It can be updated annually upon approval by the Board of Directors of the Attorney-in-Fact.

  • Why is AFIE charging this now?

    Insurance costs are rising due to inflationary increases and heavy catastrophic weather losses in the United States. AFIE management and the Subscriber’s Advisory Committee determined that it is a more cost-effective way of maintaining the required policyholders’ surplus needed to support the policies issued by AFIE. This approach helps keep our members’ premiums as low as possible.

  • Why not charge a higher premium instead of a surplus contribution?

    Direct capital contributions help reduce insurance premiums. Some reciprocal exchanges increase each policy’s premiums to generate the needed policyholder surplus. At AFIE, we’ve utilized this approach in the past. The disadvantage of this approach is that insurance policy premiums have been increasingly taxed and surcharged to support governmental programs, state regulatory departments, state insurance pools for uninsurable risks, and to pay bankrupt insurance companies’ debts. Our unique reciprocal exchange model charges a surplus contribution instead of increasing the premium, avoiding those frictional costs and ensuring that 100% of your contribution supports your insurance needs.

  • What else goes into my SCA?

    Profit distributions declared by the Board of Directors.1

  • Can I apply my SCA balance to premiums?

    Your surplus contribution may not be used to pay future premiums.

  • What if I terminate my insurance with AFIE mid-policy?

    A pro rata portion of the surplus contribution collected on the unexpired premium of the current policy will be returned to you.

  • What happens if my premium changes during the policy term?

    Your surplus contribution will be recalculated and updated pro-rata accordingly.

  • What happened to my previous SCA?

    Your previous SCA still exists. New surplus contributions will be collected and added to your account.

  • Can I pay my surplus contribution myself and not pay it through escrow?

    Unfortunately, not. Billing for the premium, fees, and surplus contribution are all sent to the mortgage company for payment when using an escrow account. When payment is received from the mortgage company, the surplus contribution is applied to your SCA.

  • How and when is my SCA balance returned to me?

    SCA balances are fully vested after five years of continuing insurance coverage written through AFIE. If your coverage terminates and you cease being a member, your SCA will be returned to you, provided you have met the five-year vesting requirement. If your membership terminates with less than five years of continuous coverage, your contribution is forfeited and retained by AFIE. In addition, if you are vested and the balance in your SCA exceeds twice your annual policy premium, the amount in excess will be returned to you.3

  • What happens if I cancel my policies and then become a member again later?

    Your vested surplus contributions are associated only with AFIE policies. If you cancel your AFIE policies, the vesting date resets, if you become a member again.

  • Are SCA distributions taxable?

    Generally not - however, each member’s tax situation is unique, so please consult your tax advisor.

1 For full details regarding SCA contribution requirements and guidelines, refer to Armed Forces Insurance Exchange Subscriber Agreement and Power of Attorney and Armed Forces Insurance Exchange Bylaws.

2 The requirements and rules governing SCA accounts are subject to Armed Forces Insurance Exchange Subscriber Agreement and Power of Attorney and Armed Forces Insurance Exchange Bylaws. Refer to these documents for complete details.

3SCA distributions are subject to approval by the Board of Directors of the Attorney-in-Fact and other limitations. Please refer to Armed Forces Insurance Exchange Subscriber Agreement and Power of Attorney and Armed Forces Insurance Exchange Bylaws for complete details.