AAI Says Residual Auto Market Burden Lessens, Still a Problem However in Several States

December 6, 2002

Despite the lowest market share in over 20 years, automobile residual market mechanisms in several states continued to burden private insurers in 2000 as revealed in the latest edition of the Alliance of American Insurers’ report “Residual Markets Automobile Insurance 2000.”

“While the 2000 [latest figures available] market shares of residual markets of all kinds was down, the accident-year loss ratio for the private passenger automobile assigned risk plans was 100 percentage points higher than that for the industry,” Roger Kenney, Alliance associate vice president of research and author of the report, said. “This gives you an idea exactly how bad the drivers in residual plans are compared with ordinary drivers.”

The 2000 accident year loss ratio on the private passenger assigned risk plans was 187.8 percent, the highest in the past five years, compared with private insurers’ ratio of 84.6 percent, the report found.

For other types of residual market automobile plans, which include Joint Underwriting Associations (JUAs), Reinsurance Facilities and a State Fund (alternative plans in this report), the total calendar-year loss ratio was 113.5 percent, according to the survey.

Market share for the private passenger automobile residual market declined significantly to 1.5 percent from its high point of 8.2 percent in 1990. “This is the smallest percent of the market these plans have held since 1975 and reflects the rate adequacy and equity that now exists in most states,” Kenney said.

North Carolina had the largest percentage of its private passenger premium written by the residual market, with 14 percent, followed by Massachusetts, which had 12 percent of its private passenger automobile premium insured in the residual market. The six other states with a market share above 1.5 percent were Hawaii, Maryland, New Jersey, New York, Rhode Island and South Carolina.

Kenney singled out South Carolina as a success story in efforts to reduce residual market population. “While retaining a residual market share above the average, South Carolina has seen a remarkable decline since it passed reform legislation in 1999,” he noted. “The legislation allowed for true cost-based pricing, which allowed for a truly competitive market. As a result, the number of licensed auto writers in the state more than doubled and the population of the residual market has plummeted from more than 25 percent of the total market. This state’s experience should send a clear message to others with large residual market populations.”

The total commercial automobile residual market underwriting loss amounted to $34 million, with New Jersey generating the largest underwriting loss: $14 million. This was followed by Virginia’s $4 million and Hawaii’s $3 million. Eight other states had losses ranging from $1 million to $2 million. These 10 states accounted for 90 percent of the net commercial residual market underwriting losses.

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