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14.2 Ensuring Auto Insurance Availability

Learning Objectives

In this section we elaborate on the residual or shared market for auto liability insurance, including the following:

  • Auto insurance plans
  • Reinsurance facilities
  • Joint underwriting associations (JUAs)
  • The Maryland State Fund

The assumption underlying laws requiring motorists to buy automobile liability insurance is that it is available. Unfortunately, some drivers cannot buy insurance through the usual channels because, as a group, their losses are excessive. As a result, people injured by such drivers might not be able to collect anything for their losses. Presumably, this problem can be solved by charging higher premium rates for such drivers, as is the case of insurers providing coverage to the so-called substandard marketInsurance market in which some companies offer limited auto coverage to high-risk drivers at high premium rates., in which some companies offer limited auto coverage to high-risk drivers at high premium rates. These insurers can do so because of the availability of computerized systems permitting them to calculate the rates for smaller groups of insureds.

The residual market (shared market)Insurance market created by state law that exists to provide insurance to people who cannot buy it through the usual channels. exists to provide insurance to people who cannot buy it through the usual channels; it is created by state law. Methods of creating this market are listed in Table 14.5 "Auto Insurance Residual Market". The private passenger percentage of cars that are insured by the shared market was largest in North Carolina in 2006 with 23.2 percent market share. This was followed by Massachusetts with 4.8 percent. In New York, the share of the residual market fell by 28 percent in 2006 to 1.7 percent, mostly as a result of legal changes.Insurance Information Institute (III), The Insurance Fact Book, 2009, 57, 62; http://www.iii.org/media/facts/statsbyissue/auto/ (accessed March 21, 2009).

Table 14.5 Auto Insurance Residual Market

Auto Insurance Plans Joint Underwriting Associations
Reinsurance Facilities Maryland State Fund

Auto Insurance Plans

Auto insurance plans were formerly called assigned risk plans because they operate on an assignment basis. In auto insurance plansArrangement in which drivers who cannot buy auto liability insurance through the usual channels can apply to be assigned to an insurer who must sell them coverage that meets the requirements of the financial responsibility law., drivers who cannot buy auto liability insurance through the usual channels can apply to be assigned to an insurer who must sell them coverage that meets the requirements of the financial responsibility law. Every company writing auto insurance in the state is a member of the plan and each must take its share of such business. If a company writes 10 percent of the auto insurance business in the state, it has to accept 10 percent of the qualified applicants. In spite of generally higher rates than those found in the voluntary market, auto insurance plans have caused significant losses to the auto insurance industry.

Reinsurance Facilities

Where there is a reinsurance facilityState plan in which every auto insurer is required to issue auto insurance to any licensed driver who applies and can pay the premium; in return, insurers can transfer the burden of bad risks to a pool to which all auto insurers belong.—as in Massachusetts, North Carolina, New Hampshire, and South Carolina—every auto insurer is required to issue auto insurance to any licensed driver who applies and can pay the premium; in return, insurers can transfer the burden of bad risks to a pool to which all auto insurers belong. As members of the pool, insurers share in both premiums and losses. The insured generally knows nothing about this arrangement; like all other insureds, he or she receives a policy issued by the company to which he or she applied. In some states, however, a specific insurer is designated to service the policy or pay for losses of a given insured; then the insured likely knows his or her status in the facility.

Joint Underwriting Associations

Where there is a joint underwriting association (JUA)State plan in which all automobile insurers are members and the association is, in effect, an insurance industry company.—as in Florida, Hawaii, and Missouri—all automobile insurers in the state are members and the association is, in effect, an insurance industry company. Several insurers are appointed as servicing carriers to act as agents for the association. An applicant for insurance who cannot meet underwriting requirements in the regular market is issued a policy by the servicing carrier on behalf of the association; as far as the policyholder is concerned, the association is his or her insurer. Premiums and losses are shared by all the auto insurers in the state, similar to the auto insurance plan. The JUA differs from an auto insurance plan in that only designated servicing carriers can issue coverage to participants.

Maryland State Fund

This government-operated residual market company provides coverage to drivers who cannot obtain insurance through the regular market. In spite of high premiums, however, it has suffered heavy losses. Originally, it was to bear such losses itself (through taxation), but the law now requires that the private insurance industry subsidize the fund.

Key Takeaways

In this section you studied the issue of affordability in auto insurance and options in the residual market for individuals unable to obtain insurance through the usual channels:

  • In auto insurance plans, drivers can apply to be assigned to an insurer who must sell them coverage that meets the requirements of the financial responsibility laws of that state.
  • Reinsurance facilities are designed to accept risk pools from insurers issuing policies to very high-risk drivers.
  • Where there is a joint underwriting association (JUA), all automobile insurers in the state are members and the association is like an insurance industry company.
  • The Maryland State Fund is subsidized by the private insurance industry.

Discussion Questions

  1. Larry, a twenty-four-year-old graduate student with three speeding tickets on his record, is considered high-risk and cannot get normal automobile insurance coverage. The state where he lives requires automobile insurance before he can register his car. Explain his options for purchasing insurance coverage.
  2. Do you think high-risk drivers should be able to obtain auto insurance at all?
  3. Explain the various structures of the residual markets.
  4. How are the residual markets funded?