What is the “residual market?” If you are “insurance-challenged” – meaning you have several moving violations, accidents on your record or a DUI or two and cannot otherwise find affordable auto insurance, the residual market may be your best (or only) alternative.
What It Is The free market is (ideally) a two-way street: you can choose which businesses you want to purchase goods and services from, and businesses can (usually) pick and choose their customers. Because insurance companies in the U.S. are private institutions, they have a right to be selective who they will and won’t sell insurance to – meaning high-risk individuals are usually out. Even if an insurer is willing to provide high risk auto insurance to an individual, the premiums are likely to be very high.
On the other hand, all but two states require that the owner-operator of a motor vehicle carry insurance coverage. A classic “Catch-22″: you are legally required to have auto insurance coverage, but hardly anyone will insure you – and those who will are going to charge you impossibly high premiums.
Enter the residual market. These are insurers that take on customers that most other insurance companies won’t touch.
How It Works A residual market is basically a high-risk pool that is set up by state government regulators. Nationwide, the residual market covers an average of 2% of all individual and commercial vehicles. This figure is higher in Massachusetts, where about 7% of insurance customers are placed in the residual market, and North Carolina, which has a whopping 24% of drivers insured through the residual market.
Although it is set up and regulated by the state, the residual market is not a government insurance program; all insurers that operate in a given state are required to participate as a condition of being allowed to sell insurance in that state. Under a residual market, losses are spread among all the insurers of a state, not just one.
While coverage through a residual market may not be the cheapest or best car insurance, for high-risk drivers, it is usually the only alternative.
Massachusetts Reform Continues Under insurance reforms designed to increase market competition by attracting more insurers to the Massachusetts auto insurance market – and thus provide insurance customers with lower rates – insurance companies that did not formerly underwrite insurance policies in the Bay State were given a two-year period in which they were not required to participate in the residual market. The result is that eleven new insurers have opened offices in Massachusetts, including major insurers such as GEICO, Progressive and Allstate. This has had the effect of not only providing most Massachusetts drivers with some of the best car insurance rates, but has actually brought much-needed jobs to Massachusetts communities.
This is about to change; state governor Deval Patrick recently signed legislation that would eventually end this exemption and force these insurers into the residual market. While it is inevitable that all Massachusetts auto insurers are going to experience some losses, the addition of major national insurers with billions of dollars in assets will go a long way toward spreading these risks and commensurate losses among a larger pool – and ultimately, this will greatly benefit consumers.
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