PCI Study Examines State Residual Auto Markets

April 2, 2004

The Property Casualty Insurers Association of America has released its analysis of “residual auto market populations” and has found a connection between such assigned risk plans and state rating laws.

The study determined that these “markets of last resort” are lower and that all consumers have more choices in purchasing auto insurance in states with more competitive rating laws.

“Residual markets provide auto insurance for motorists unable to obtain coverage in the voluntary market. There are different systems under which residual markets operate,” said the announcement. “The majority of states have assigned risk plans and a handful have alternative plans known as Joint Underwriting Associations (JUA) or reinsurance facilities; one even has a state-run fund. The goal of the PCI study was to determine what common factors contributed to states having the highest residual market populations.”

The PCI explained that it had reviewed the market in 8 states “along with their latest five year average personal auto residual market share as a percent of the total number of insured cars in those states. The states are North Carolina (22.30 percent); South Carolina (13.87 percent); Massachusetts (8.88 percent); New York (4.52 percent); Rhode Island (2.85 percent); Maryland (2.52 percent); Hawaii (2.18 percent) and New Jersey (2.17 percent).”

“There are number of common characteristics shared by the states in this analysis, including similar regulatory rating laws. In states where file and use or other competitive rating is in place for auto insurance, residual market populations are lower and in states where restrictive laws are in place, residual markets decline when they change to competitive rating laws,” stated Diana Lee, PCI assistant VP-research.

The bulletin noted the following “Highlights:
— Among the nation’s total private passenger cars that are covered in residual markets, nine out 10 (90.3 percent) are found in the eight states with the largest plan populations.
— Half of the states with the highest plan populations (Hawaii, Massachusetts, New Jersey and North Carolina) had some form of administered price controls during most of 1997 – 2001. A review of all states in the nation without changes in their rating laws during the same time shows that the group with the price control laws have an auto residual market share more than five times greater than the group of states with file-and-use laws. This suggests that more competitive rating laws help lower the state’s auto residual market population.
— In some states where the rating law changed to a more open market, a noticeable drop in the residual market occurred. South Carolina abolished its prior approval rating law in 1997 and replaced it with a flex-rating program. Before auto reform went into effect in March 1999, South Carolina’s residual market share was mostly in the 30 to low 40 percent range (about 750,000 insured cars out of 1.7 million insured cars in the state). Today, the involuntary market in South Carolina has fewer than 600 motorists.
— Other examples of the connection between greater competition and smaller residual market sizes are the District of Columbia and New York. Both states changed their rate regulatory systems in the mid-1990s to less restrictive systems. Residual market plans in both states are now 8 to 10 percentage points lower than what they were prior to the transition.

“In those states where competition is the primary regulator of price, the residual market penetration is low. On the other hand, in those states with high plan populations, there are more restrictive price controls,” Lee emphasized. “Although other factors impact residual market populations, it is clear that consumers benefit from greater choices and better prices for their insurance when in states with competitive rating systems.”

A complete copy of the study can be obtained upon request by contacting the PCI at: http://www.pciaa.net/

Was this article valuable?

Here are more articles you may enjoy.