South Carolina Life Insurance Practice Exam

Which of the following insurance options would be considered a risk-sharing arrangement?

1. Reinsurance

2. Reciprocal

3. Direct purchase insurance

4. Pooling insurance

The correct answer is: Reciprocal

A reciprocal insurance arrangement is fundamentally a risk-sharing mechanism where members of the group agree to share risks among themselves. In this model, policyholders also take on the role of insurers, pooling their resources to provide coverage for each other. This cooperative effort means that each member pays premiums into a common fund, which is then used to cover claims that arise within the group. Unlike traditional insurance, where one party (the insurer) accepts the risk in exchange for premiums, a reciprocal exchange involves mutual agreement and shared responsibility among the participants. This cooperative nature facilitates a unique relationship where all members have a vested interest in the performance and stability of the pooled risks. Reinsurance, in contrast, involves one insurance company transferring some of its risk to another, rather than sharing risk directly among policyholders. Direct purchase insurance refers to a straightforward transaction between an insurer and an insured without any shared risk among multiple parties. Pooling insurance may refer to risk pooling but does not encapsulate the cooperative and member-centric nature of a reciprocal arrangement. Thus, the reciprocal is the most aligned with the concept of risk-sharing arrangements.