When you get a homeowners policy from an insurance company, you may notice that it includes a “surplus contribution.” A surplus contribution is a small fee that goes toward maintaining an insurance company’s ability to pay claims.

Essentially, a surplus contribution acts as a buffer for claims – like an extra financial safety net. More importantly, it can actually save you money over time. The more reserves your insurance provider has to pay claims and cover operating costs, the lower it can keep their prices.

State regulators approved the surplus contribution. And while you can’t opt out of it, it’s typically refundable on a prorated basis if your policy is canceled.

Surplus contributions and reciprocal exchanges

Some insurance companies are set up as reciprocal exchanges, where the policyholders actually own the company, while an attorney-in-fact manages it for a set percentage. In that situation, you pay your surplus contribution to the reciprocal exchange with the understanding that it will be credited as policyholder surplus for the benefit and protection of all the subscribers.

What is a policyholder surplus?

A policyholder surplus is an insurance company’s admitted assets minus what it owes in claims. This is a strong indication of an insurer’s financial strength and capacity to write new policies.

A greater policyholder surplus means a company is financially sound –  it has more assets than losses and can easily pay claims. And surplus funds can be used for exactly that: paying for claims that exceed what reinsurance covers (and it covers a lot). 

What are subscribers?

Policyholder and subscriber are interchangeable terms. But because a reciprocal exchange is a true peer-to-peer insurance company, policyholders are often called subscribers or members. It’s a hat tip to the fact that when you buy a policy from a reciprocal, you are part of the company. You and your fellow subscribers are actually insuring each other, technically speaking.

Reciprocal exchanges usually have Subscribers’ Advisory Committee (SAC) to protect your rights as a subscriber. The SAC makes sure that the insurance company:

• Takes the required surplus.

• Manages funds based on fiduciary rules

• Conform to the subscriber agreement. 

Plus,an SAC ensures you have an active presence in all that your insurer does. Think of this committee as your sounding board – they listen to your feedback to guide your insurance company’s decisions in using resources and making improvements to its processes.