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Not every insurer fits neatly into the stock-versus-mutual framework. Fraternal benefit societies and reciprocal insurers are two older, member-driven forms that the exam treats as distinct categories of their own.
A fraternal benefit society is, first and foremost, a social and charitable organization — its insurance offerings exist to serve its own members, who are often connected by a shared religion, nationality, or ethnic background. Fraternal societies have operated in the United States for well over a hundred years, originally funding member benefits through pure assessments collected only when a loss occurred. Most fraternals today instead fund their benefits using the same advance-reserve methods as commercial insurers.
To legally qualify as a fraternal benefit society, an organization must meet three requirements:
The Independent Order of Foresters and the Knights of Columbus are both well-known fraternal benefit societies that combine social and charitable missions with member insurance benefits.
A reciprocal insurer is an unincorporated group whose individual members — called subscribers — agree to insure one another's risks directly. Unlike a stock or mutual company, a reciprocal does not transfer risk to a separate corporate entity; each subscriber personally shares in the risk brought by every other subscriber, which makes a reciprocal a risk-sharing arrangement rather than a true risk-transfer mechanism.
Because managing a large group of individual subscribers directly would be impractical, a reciprocal is run day to day by an attorney-in-fact, who handles transactions on behalf of the subscribers under the oversight of a board of governors.
Like policyowners of a mutual company, subscribers of a reciprocal insurer receive dividends and are entitled to their share of the company's surplus if they end their membership.