Residual Market Overview
This section describes the evolution of the residual market, the various types of residual
market mechanisms in use today, and the size and characteristics of the residual market
populations. Also included is a listing of the residual market mechanisms employed in each
state, and an overview of AIPSO and its services.
What is the Auto Residual Market?
The residual market (also known as the "shared market") consists of those
consumers who are unable to purchase automobile insurance through the voluntary market due
to a variety of factors, such as their driving history or status as first-time drivers.
Due to these factors, insurers expect that the future experience of these drivers will be
higher than the predictions of losses and expenses underlying their voluntary market
rates. For the vast majority of jurisdictions, this business is shared among the companies
in two ways: (1) applications in the residual market are divided equitably through direct
company assignment of the applicant, or (2) participation in the results of various
pooling mechanisms.
Why is there an Auto Residual Market?
In the early days of the automobile, there were no requirements for motorists to buy
insurance, and insurance companies were free to insure only those who met their
underwriting criteria. As car ownership grew, the financial consequences of the increasing
number of automobile accidents became apparent. As a result, states began passing laws
making the possession of automobile liability insurance a virtual necessity for most
motorists. Under financial responsibility laws, those who didn't have coverage faced the
loss of their right to drive if they caused an accident for which they could not pay. The
dilemma facing the insurance companies then was how to satisfy the legal, social, and
economic need for automobile insurance in a manner that was equitable to all. The
insurance industry's solution was to establish a mechanism in each state to provide
coverage for those drivers who were unable to obtain insurance in the voluntary market.
However, each applicant must meet eligibility requirements.
How large is the Residual Market?
In 2005, more than $2.7 billion of premium was written in the automobile insurance residual market,
representing 1.4% of the total direct written premium for the automobile insurance market in the
United States for that year.
The number of private passenger autos insured through residual market mechanisms is not distributed
evenly among all states. Depending upon such factors as government regulations and industry competition,
the size of the residual market can vary dramatically from one state to another. For example, the
residual market mechanisms in such states as South Dakota, Washington, and Wyoming reported fewer
than 15 private passenger written car years in 2004. In contrast, more than 135,000 private passenger
written car years were reported in the residual market in each of the five largest states during the same year.
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