Residual Markets Continue to Burden Auto Insurers

A new report by the Property Casualty Insurers Association of America (PCI) shows that residual market plans for private passenger auto insurance continue to result in significant losses for insurance companies. But one state, South Carolina, has turned the corner on this trend reportedly thanks to legislative reform that encouraged market competition.

All states and the District of Columbia have systems in place – commonly known as “assigned risk plans” – that guarantee coverage for motorists who cannot obtain insurance in the private market. The assigned risk plans and similar programs are part of what’s known as the shared, or residual market. Policyholders are assigned to various companies that write business in that state. Insurers must provide coverage and pay claims for these policyholders.

According to the report, the private passenger auto residual market increased from 1.5 percent of premiums nationwide in 2000 to 1.8 percent in 2001. That reverses a trend that has seen an annual decline in the residual market share since 1992 when it was at 5.6 percent.

In the vast majority of states, the market share is less than one percent, but seven states have more than the average market share. In North Carolina, it’s 15.4 percent and in Massachusetts, it’s 11.2 percent.

“While the residual market share has remained fairly low over the past few years, loss ratio in 2000 and 2001 skyrocketed,” said PCI’s Roger Kenney, PCI’s assistant vice president of research. “The loss ratio decreased somewhat from the record level of 181.8 in 2000, but the loss ratio of 146.1 was still 75 percent higher than the loss ratio for the private auto industry in 2001. New York, in particular, raised concerns because of its large residual market and high loss ratio of 156. With those kinds of losses, it’s obvious that the rates being charged in New York are inadequate.

“The one bright spot in our study is South Carolina, where legislative reforms made in the late 1990s have had a positive impact. The residual market share there dropped from over 25 percent of all policies in 1998, to 1.2 percent in 2001. Clearly, the influx of new insurance companies into the market has had a positive impact on making affordable insurance available to South Carolina motorists.”

Other key findings of the report include:

· The automobile business written by residual market plans in nine states generated an underwriting loss of $596 million in 2001. (Florida, Hawaii, Maryland, Massachusetts, Michigan, Missouri, New Hampshire, North Carolina and South Carolina)
· Losses in North Carolina, where 15.4 percent of the premium is in a residual market plan, amounted to $171 million
· Losses in Massachusetts, which has a unique plan, totaled $337 million for both personal and commercial auto policies