Financial Condition of Insurers
Overview: Residual Markets
Making Insurance Available to All
Applicants for property, auto and workers compensation insurance who are considered “high risk” may have difficulty obtaining insurance through regular “voluntary” market channels. To make basic coverage more readily available, states have established special insurance plans, known as residual, shared or involuntary markets.
In states where rates charged to high-risk policyholders are too low to support the residual program’s operation, insurers are usually assessed to make up the difference. These additional costs are typically passed on to all insurance customers in the form of policy surcharges. However, in a few states, insurers are not able to recoup their residual market losses; regulation prevents rates from rising to the level they should be actuarially.
Three Key Residual Insurance Markets
Residual programs provide high-risk customers with traditional insurance products, including property, automobile and workers compensation.
- Residual Property Insurance—Consumers in this market segment primarily fit into two categories: those seeking windstorm coverage for properties in designated coastal areas and those seeking windstorm and other coverages for both urban and coastal properties via Fair Access to Insurance Requirements (FAIR) plans (initially developed for inner city customers who were denied coverage). These markets are primarily served by state-run insurers that operate as insurance pools, where insurers combine resources to act as a single insuring entity, sharing premiums, losses and expenses in agreed-upon amounts. Numerous coastal states, including Alabama, Connecticut, Florida, Georgia, Louisiana, Massachusetts, North Carolina and Texas, are in the process of changing how their residual property insurance pooling systems are structured and funded.
- Residual Automobile Insurance—As of 2007, just over 1 percent of the nation’s automobiles were insured through residual markets. Assigned risk plans are the most common type of automobile residual insurance, currently found in 42 states and the District of Columbia. With this model, insurance companies that offer automobile liability coverage underwrite a proportion of residual policies equal to the amount of their voluntary business. Four states—Florida, Hawaii, Michigan and Missouri—handle residual auto insurance through state-mandated pooling mechanisms (Joint Underwriting Associations).
- Residual Workers Compensation Insurance—The voluntary market increasingly serves those seeking workers compensation insurance. In cases where voluntary workers comp insurance cannot be obtained in the voluntary market, purchasers can seek out coverage in residual markets established by state regulators. The mechanisms used to handle workers comp vary from state to state; common models include assigned risk and reinsurance pooling.
- III White Paper—Residual Markets
An in-depth review of residual market trends and practices.