The Enigma Of Residual Markets: Unraveling The Insurance Industry's Niche Terminology

The insurance industry term residual market refers to an insurance market system that serves as a coverage source of last resort for individuals and firms who have been rejected by voluntary market insurers. It is also known as the non-voluntary or shared market, as state insurance regulators assign insurers to these policies rather than insurers choosing to take them on voluntarily. Residual markets are most often used for workers' compensation, personal automobile liability, and property insurance. In the case of auto insurance, for example, the risk of insuring high-risk drivers is spread among the licensed insurers within a state. Residual market policies are assigned to insurers based on their market share. Residual market loads (RMLs) are factors that insurers apply to workers' compensation policies to recover costs assessed to them by states for deficits in the residual markets.

Residual markets are a source of last resort for those rejected by voluntary insurers

Residual markets are also known as non-voluntary or shared markets because state insurance regulators assign drivers to insurers, rather than insurers voluntarily choosing to insure them. Residual market policies are assigned to insurers based on their market share. If a particular insurance company writes a large percentage of the policies in the state, they will be obligated to accept more high-risk motorists than smaller companies.

There are many factors that result in drivers needing to acquire auto insurance from the residual market. One is the driver’s history, including their history of driving tickets, accidents, and claims. Individuals with a number of convictions for driving offenses, such as driving under the influence, may also have difficulty finding an insurer who will willingly issue them a policy.

In many states, the residual market refers to an assigned risk pool in the personal auto market or a Fair Access to Insurance Requirements (FAIR) plan in the homeowners' market. FAIR plans were initially enacted by more than a dozen states across the country in response to the Fair Housing Act of 1968 (also known as the Civil Rights Act of 1968). FAIR plans were established to provide homeowners' insurance for homes that can’t qualify in the standard market.

Residual markets are a necessary part of the insurance world when there are regulations or requirements that some customers will struggle to meet. Being educated about local residual markets (and other options) is a way to make sure that customers are being served.

They are also known as the non-voluntary or shared market

The residual market, also known as the non-voluntary or shared market, is a segment of the auto insurance market that serves as a coverage source of last resort for drivers who are considered high-risk and are rejected by voluntary market insurers. State insurance regulators assign drivers to insurers in the non-voluntary market, rather than allowing insurers to voluntarily choose to insure them. This is because drivers in the residual market are deemed to have a higher risk profile, often due to their history of driving tickets, accidents, and claims, as well as convictions for driving offenses such as driving under the influence.

In the non-voluntary market, insurers are obligated to accept high-risk motorists based on their market share. This means that larger insurance companies writing a large percentage of policies in a state will be required to take on more high-risk motorists than smaller companies. The risk of insuring these drivers is spread among the licensed insurers within the state.

The non-voluntary market is not limited to auto insurance. It also covers other lines of insurance, most notably workers' compensation and property insurance. In the case of property insurance, Fair Access to Insurance Requirements (FAIR) Plans, Beach and Windstorm Plans, and state-run insurance companies provide coverage for individuals who cannot obtain insurance through the voluntary market, often due to living in high-risk areas.

Residual market policies are assigned based on an insurer's market share

The residual market is a segment of the auto insurance market that serves as a coverage source of last resort for drivers who are considered high-risk and are denied coverage by insurers. It is also known as the non-voluntary or shared market because state insurance regulators assign drivers to insurers, rather than insurers choosing to insure them.

Residual market policies are assigned to insurers based on their market share. If an insurance company writes a large percentage of policies in a state, they will be obligated to accept more high-risk motorists than smaller companies. This is because the residual market works by spreading the risk of insuring these drivers among the licensed insurers within the state.

In many states, this refers to an assigned risk pool in the personal auto market or a Fair Access to Insurance Requirements (FAIR) plan in the homeowners' market. FAIR plans are a type of high-risk homeowners' insurance program that provides coverage for homes that cannot qualify for standard insurance. They are often found in areas with a high risk of natural disasters, such as the Atlantic and Gulf coasts, which are prone to tropical cyclones.

While the residual market is a necessary part of the insurance industry, it is important to note that the policies it offers are typically more expensive than those available on the standard market. This is because insurers in the residual market are assuming greater risks by covering individuals or firms that have been rejected by voluntary market insurers.

The excess and surplus (E&S) market is less regulated and often fills the gap

The excess and surplus (E&S) market is a critical component of the insurance industry, catering to businesses with unique or higher-risk insurance needs that cannot be met by traditional insurance providers. This market is less regulated, allowing E&S carriers to take on more significant risks and set their own premiums, adapting to business trends faster than standard insurers.

The E&S market offers customised solutions to businesses with non-conventional risk profiles. For example, a business located in an area prone to unique risks, such as hurricanes or wildfires, might only be able to insure these risks through the E&S market. This market also handles higher risks, such as emerging technology companies, enterprises working with hazardous materials, or businesses in catastrophe-prone areas.

The E&S market is also known as the non-admitted or unlicensed insurance market, as the insurers are not licensed in the buyer's state. This market is heavily dominated by insurers affiliated with Lloyd's of London, with 16.8% of the market share. Other top E&S carriers include Berkshire Hathaway, American International Group (AIG), and Markel Corporation Group.

While the E&S market is less regulated, it does have some regulations to follow. E&S insurers must be licensed in their home states and the brokers selling these policies must be licensed in their own states. Additionally, surplus lines insurance is generally more expensive than standard insurance due to the higher risks involved.

The E&S market fills the gap for businesses that cannot obtain insurance through the standard market, providing a dynamic and essential service within the insurance industry.

FAIR plans are a type of residual market for high-risk homeowners' insurance

The insurance term "residual market" refers to insurance market systems for various lines of coverage, most often workers' compensation, personal automobile liability, and property insurance. It serves as a coverage source of last resort for firms and individuals who have been rejected by voluntary market insurers. In other words, it is a segment of the auto insurance market that serves drivers who are considered high-risk and are denied coverage by insurers.

FAIR (Fair Access to Insurance Requirements) plans are a type of residual market for high-risk homeowners' insurance. They are state-mandated property insurance plans that provide coverage to individuals and businesses who are unable to obtain insurance in the regular market. These plans are typically used as a last resort and provide basic coverage for properties that are considered high-risk or difficult to insure due to factors such as location, age, or type of construction.

FAIR plans were created to address the issue of insurance market unavailability, which occurred when insurance companies stopped providing coverage to high-risk properties and individuals in certain geographic areas due to factors such as natural disasters, changes in building codes, and rising insurance costs. These plans are available in over 30 states and Washington, D.C., and are typically more expensive than standard homeowners' insurance policies.

While FAIR plans are a type of residual market, it is important to note that not all residual markets are FAIR plans. There are also other types of residual markets, such as Beach and Windstorm Plans, which are prevalent in coastal areas.

Frequently asked questions