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Reciprocal insurance exchanges: structure and ownership
How reciprocal exchanges such as USAA, Erie and the Farmers Exchanges work: subscribers, the attorney-in-fact, surplus, fees, dividends and your rights.
A reciprocal insurance exchange is an unincorporated group of policyholders, called subscribers, who agree to insure one another. A separate company, the attorney-in-fact, runs the exchange for a fee, and the surplus the exchange builds belongs to the subscribers collectively, not to shareholders. The result looks like a mutual to the customer, but the manager can be a for-profit company, and that difference is where most of the questions come from.
The three parts of an exchange
Every exchange has the same three components.
Subscribers. These are the policyholders. In Texas law, a subscriber is an individual, partnership or corporation that enters into a reciprocal or interinsurance contract through an attorney in fact, according to the definitions in Texas Insurance Code section 942.001. By buying a policy you become a subscriber and agree to the exchange's terms.
The exchange. It is the pooled entity: an "unincorporated association of individuals, partnerships, and corporations that agree to insure one another," in the words Erie Indemnity uses to describe the Erie Insurance Exchange in its 2025 annual report. It holds the premiums, pays the claims and owns the assets, but it has no shares.
The attorney-in-fact. Each subscriber signs a power of attorney that appoints a manager to act for the group. The Texas statute defines the attorney in fact as the person or business that acts for subscribers under a power of attorney, issuing the exchange's contracts. Erie's filing says each subscriber executes a "limited power of attorney" appointing Erie Indemnity as attorney-in-fact, a role the company says it has held since 1925. In practice the attorney-in-fact sells policies, underwrites risk, files rates with regulators, handles claims, invests assets and employs the staff. It is paid a fee out of the exchange's premium.
The key structural fact is that the attorney-in-fact and the exchange are separate entities with separate owners. For USAA, our USAA profile records the manager as USAA Reciprocal Attorney-in-Fact, Inc., a separate company from the exchange itself. For Erie, the manager is a publicly traded company. For the Farmers Exchanges, it is a subsidiary of Zurich. The exchange's customers are in the same legal position in each case, but the management company's incentives differ.
How the structure compares
| Stock insurer | Mutual insurer | Reciprocal exchange | |
|---|---|---|---|
| Owners | Shareholders | Policyholders | Subscribers (policyholders) |
| Legal form | Corporation | Corporation without shares | Unincorporated association |
| Who runs it | Board and executives | Board and executives | Attorney-in-fact under power of attorney |
| Where surplus sits | Company capital, owned by shareholders | Company surplus, owned collectively | Exchange surplus, held for subscribers collectively; some exchanges credit it to subscriber accounts |
| Who profits from management | Shareholders | Not applicable | The attorney-in-fact, through its fee |
| Raising capital | Sell shares or borrow | Retained earnings, borrowing | Retained earnings, surplus contributions, surplus notes |
Our guide to mutual vs stock insurers: does ownership matter? covers the first two columns in detail. This post concentrates on the third, because it is the one that confuses policyholders and sometimes journalists. When a news story says an insurer is "owned by its policyholders," it usually means a mutual or an exchange, and the difference between them lies in who manages the money.
Ownership, surplus and the subscriber savings account
An exchange's surplus is the capital left after claims and expenses. It is a cushion for bad years and the source of any money returned to subscribers. Who owns it depends on how the exchange's documents and state law treat it.
Farmers is explicit about ownership on its Truck Insurance Exchange update page: policyholders own the Exchange, and "subscribers of the Exchange are owners until such time as they no longer have insurance from the Exchange." The page adds that net premium earnings that the Exchange keeps are added to surplus. That last point is a limit on what ownership means. Subscribers do not hold a transferable share; their interest is tied to their policy.
Some exchanges go further and track surplus in individual subscriber savings accounts. Florida's reciprocal-insurer chapter shows how state law can accommodate that. Under Florida Statutes section 629.271, a reciprocal insurer may return to its subscribers "any unused premiums, savings, or credits accruing to their accounts," provided it does not unfairly discriminate among subscribers, and it may distribute part of its unassigned funds with the state's prior written approval, up to 10% of surplus and limited to 50% of the previous calendar year's net income. Section 629.281 says that if the exchange's authority ends and it is wound up, the remaining assets go to subscribers who held policies in the preceding 12 months, under a formula the state approves. This is Florida law; other states set their own rules.
The mechanics at CURE, a New Jersey-based exchange, show how contributions to surplus can work. New Jersey's financial examination of the exchange as of December 31, 2022 says its attorney-in-fact is paid a fee of up to 12.5% of gross written premium, and that New Jersey and Pennsylvania subscribers pay a continuing surplus contribution of 10% of annual premium (20% in the first year for certain high-risk new subscribers). Michigan subscribers who joined on or after July 1, 2023 pay 25% for three years and 15% afterward. The report adds that the return of surplus to subscribers can occur only after a subscriber withdraws and only with the approval of the attorney-in-fact and the commissioner. In other words, the money is yours in principle but not available on demand. That is the sort of term to ask about when you compare quotes from exchanges. The CURE Auto Insurance profile summarizes the program.
The fee: what the attorney-in-fact is paid
The attorney-in-fact's compensation is the most scrutinized part of the structure, so it is worth looking at real figures.
- Erie. The Erie Indemnity 2025 annual report says the management fee "may not exceed 25% of the direct and affiliated assumed premiums written by the Exchange," that the Board sets the rate at least annually, and that it set the 2026 rate at 25%. The filing also says agent compensation was approximately 71% of policy issuance and renewal expenses in 2025, so independent-agent commissions are the largest single cost of selling and renewing Erie policies, a channel described in insurers sold only through independent agents: how you get a quote.
- Farmers. Farmers says the Truck Insurance Exchange's subscription agreement "specifies an AIF fee of 20 percent of premium, although TUA has taken less than that amount." For 2025, according to the same page, the attorney-in-fact fee was 14.1% of the premium dollar, including an attorney-in-fact profit of 7.12%. The Truck Underwriters Association is the manager for that Exchange; the larger Farmers Exchanges are managed by Farmers Group, Inc.
- CURE. Up to 12.5% of gross written premium, per the New Jersey examination described above.
A fee is not the same as profit. The Farmers page shows the split: a portion covers costs and a smaller portion is profit. Erie's filing shows that the bulk of its fee-funded expenses go to agents. When you hear that an attorney-in-fact is paid "up to 25%," that is a ceiling, and the part that matters to subscribers is how much is profit and how much is cost.
A worked example
The numbers below are hypothetical and show how a cap works. Say an exchange's agreement lets the attorney-in-fact take up to 20% of premium, and the exchange collects $1,000 from a subscriber.
| Item | Amount |
|---|---|
| Premium collected | $1,000 |
| Maximum attorney-in-fact fee at 20% | $200 |
| Fee actually charged this year at 14% | $140 |
| Left for claims, taxes and other exchange costs and to build surplus | $860 |
The attorney-in-fact uses its $140 to pay commissions, salaries and technology. Anything it keeps after its own costs is its profit. The exchange keeps the remaining $860 to pay claims and expenses; any underwriting profit adds to surplus. A subscriber cannot see this split on a bill. It is visible in the exchange's annual statement, the filings the exchange makes with its state regulator.
Dividends, givebacks and disputes
Dividends
Exchanges can return money to subscribers when they have surplus to spare. USAA is the largest example. According to the San Antonio Report's coverage of USAA's 2025 results, the organization distributed about $3.8 billion in distributions, dividends and bank rebates in 2025, which it described as record returns, and its net worth rose from $32.3 billion in 2024 to $38.6 billion. The same report does not break down the $3.8 billion by type, so do not read it as an insurance-only dividend figure. Dividends are discretionary and depend on results and, in some states, regulatory approval; see dividends, givebacks and participating policies in car insurance for how they work.
Disputes over fees
Because the attorney-in-fact is paid from subscribers' premium and may be a profit-seeking company, fee disputes are the characteristic legal fight. Two examples show what that looks like:
- Farmers. In April 2008 Insurance Journal reported that a California appeals court had allowed policyholders to challenge the fees Farmers Group, Inc. charged as attorney-in-fact of three Farmers Exchanges, rejecting the argument that the fees were already approved as part of rate requests. The plaintiff alleged that the management companies had taken more than $4.5 billion in fees from 2000 to 2002; the defendants said they collected less than 20% of premiums. In October 2010 Zurich announced a settlement of the resulting Fogel class action under which USD 455 million would be available to as many as 13 million policyholders, an estimated average of about USD 35 per class member. Zurich and Farmers Group said they did not accept that the claims had any basis.
- Erie. The Erie Indemnity filing reports a pending lawsuit alleging that Indemnity breached fiduciary duties in connection with setting its management fee.
Both sets of facts are from public filings and press releases, and neither tells you how a dispute about your exchange will end. The point is that a fiduciary relationship exists. Florida's statute, for example, requires the power of attorney to state that the attorney in fact has a fiduciary duty to subscribers and to state the maximum amount that can be deducted from premiums. If you think a fee is unreasonable, a licensed attorney and your state insurance department can advise you on the options in your state.
Policyholder rights and regulatory oversight
Subscribers are protected by two kinds of rules: those that govern every insurer, and those unique to reciprocals.
Every insurer. A reciprocal that sells car insurance must be licensed by the state, file rates and forms where the state requires it, and follow claims-handling and consumer protection rules. Complaints go to the same place as for any insurer: the what your state insurance department does in your state. If an insurer fails, the state guaranty fund covers claims within its limits, as explained in what happens if your car insurer goes insolvent.
Reciprocals specifically. State codes impose rules about the structure itself. Examples from Texas and Florida:
- In Texas, the department must approve the attorney-in-fact's power of attorney or other authorization (section 942.051); the exchange must file an annual report (942.201) and is subject to examination by the department (942.202); and its subscribers' liability is tied to minimum capital and surplus (942.152).
- In Florida, the exchange must hold required surplus funds (629.071), the power of attorney must state the maximum fee and the attorney's fiduciary duty (629.101), and a subscribers' advisory committee, at least two-thirds of whom are not the attorney or connected to it, supervises the exchange's finances and operations and arranges audits (629.201).
Those are two examples. Your state's insurance code is the source for your state's version, and the department can tell you how it applies. For the practical question of what you can influence, subscribers rarely vote in the way shareholders do. Their protection comes from regulation, the advisory committees some states require, and the fiduciary duty.
What the structure means for ratings and capital
A reciprocal cannot sell stock. When it needs capital quickly, it has three main routes: retained earnings, borrowing through surplus notes, and reinsurance. Some exchanges also collect surplus contributions from subscribers, as CURE does.
CSAA Insurance Exchange, which issues policies for many AAA members, is a recent example of the borrowing route. AM Best announced in February 2025 that it had assigned an issue credit rating of "a-" to the exchange's new $500 million surplus notes, with a negative outlook on that rating, at an 8.125% rate and a 2045 maturity. The notes were intended to support capital for expected premium growth and add a layer of protection for catastrophic losses, and they can be redeemed only with the prior approval of the California Department of Insurance. In July 2025 AM Best moved the outlook on CSAA's long-term issuer ratings to stable from negative. The detail is in the February 2025 AM Best announcement, and our guide to AM Best financial strength ratings explained shows how to read such ratings.
What this means for you: financial strength depends on the exchange's surplus, its reinsurance and its underwriting results, not on its legal form. Large exchanges such as Erie's, with statutory policyholders' surplus of $10.1 billion at December 31, 2025 according to Erie's filing, can be very strong; smaller exchanges may be thinner. Check the rating of the specific entity that issues your policy. how to read an insurer's combined ratio and surplus explains the underlying numbers.
How to find out what structure your insurer uses
- Read the front of your policy or declarations page. It names the issuing company. "Exchange" or "Interinsurance Exchange" in the name signals a reciprocal. A single brand can span an exchange and companies that are not exchanges.
- Check the NAIC group. Our insurer profiles list the legal name and NAIC group.
- Look at the insurer's about page or annual report. Public attorney-in-fact companies, like Erie Indemnity, file annual reports with the SEC.
- Ask the insurer: Who is the attorney-in-fact? What is the fee or its cap? Is there a surplus contribution? Is there a subscriber advisory committee?
- Ask your state insurance department what filings the exchange makes there.
Common questions
Do I own part of the insurer if I buy from an exchange?
Collectively, yes, in the way policyholders own a mutual. Farmers describes its subscribers as owners while they hold a policy. But you hold no transferable shares, and your interest in surplus ends when you leave unless the exchange's rules say otherwise.
Is a reciprocal exchange safer or riskier than a regular insurer?
Neither by definition. Safety depends on surplus, reinsurance and management. Use the AM Best rating of the specific company and its record with the department.
Can an exchange call on subscribers for more money?
Statutes address subscriber liability and assessments, and Florida, for example, has sections on them. Whether your policy can be assessed depends on your state and your contract, so read the policy and ask the insurer.
Why does the manager's ownership matter?
Because a for-profit manager is paid out of the premium. When the manager is a public company, as with Erie Indemnity, its shareholders benefit from the fee, while the exchange's subscribers benefit from surplus. The two are meant to be aligned but are not identical, which is why courts and regulators have examined fees. Occupation-focused exchanges such as California Casualty are covered in occupation-based auto insurers: educators and first responders.
Key takeaways
- A reciprocal exchange is a group of subscribers who insure one another, run by an attorney-in-fact under a power of attorney; the exchange has no shareholders.
- The attorney-in-fact is paid a fee from premium, capped in the contract: 25% at Erie in 2026, 20% under the Truck Insurance Exchange agreement, up to 12.5% at CURE.
- Surplus belongs to subscribers collectively, and some exchanges credit it to subscriber accounts or collect surplus contributions; returns need approval and are not guaranteed.
- Exchanges raise capital through retained earnings, surplus notes and reinsurance, so judge them by the rating of the specific entity.
- State law, not the exchange's marketing, defines subscriber protections; check your state's insurance code and department.