A coalition of independent agricultural businesses forms an unincorporated association to share property risks. Each member agrees to indemnify the other members against losses, and the daily operations are managed by an attorney-in-fact. To protect against catastrophic weather events, a separate incorporated entity—which is owned by shareholders and issues nonparticipating policies—agrees to assume a portion of the agricultural association's risk.
Based on standard classifications of insurers, which of the following statements are correct?
- The unincorporated agricultural association is operating as a reciprocal insurance exchange.Answer
- The incorporated entity is operating as a stock insurance company acting in the capacity of a reinsurer.Answer
- CThe incorporated entity is structured as a mutual insurer because it exists to earn a profit for its shareholders.
- DIn the event of a catastrophic weather loss, the individual agricultural businesses will submit their claims directly to the incorporated entity for payment.
Answer
The correct statements are that the agricultural association is a reciprocal insurance exchange and the incorporated entity is a stock insurance company acting as a reinsurer.
The unincorporated association matches the precise definition of a reciprocal exchange (members indemnifying each other via an attorney-in-fact). The incorporated entity exhibits the standard characteristics of a stock insurer (shareholder ownership, nonparticipating policies) and is functioning as a reinsurer because it is assuming risk from the primary insurer.
Step-by-Step Solution
Key Concept
Types of Insurers: Reciprocal Exchanges, Stock Companies, and Reinsurers