Insurance Broker Certification Practice Exam

Reciprocal insurance arrangements are formed through what type of agreements?

1. Formal legal contracts

2. Informal verbal agreements

3. Reciprocal agreements of indemnity

4. Underwriting agreements

The correct answer is: Reciprocal agreements of indemnity

Reciprocal insurance arrangements are established through reciprocal agreements of indemnity. In these arrangements, members, known as subscribers, come together to provide insurance for one another. Each member agrees to indemnify the others, sharing the risk amongst themselves. This mutual exchange of risk forms the foundation of reciprocal insurance, emphasizing cooperation and collective responsibility for losses incurred. Each subscriber contributes to a common fund, which is used to pay claims made by any member of the group. The reciprocal nature of this agreement encourages a stronger sense of alignment among members, as they all have a vested interest in the group's overall risk management and financial health. The other choices do not accurately capture the nature of reciprocal insurance. Formal legal contracts typically refer to traditional insurance policies that involve insurers and policyholders, while informal verbal agreements lack the legal enforcement needed for insurance obligations. Underwriting agreements generally pertain to the process of evaluating and assuming risks rather than the mutual indemnification aspect that reciprocal agreements embody.