1. Residual Markets: “Last Resort” Coverage
2016 Annual Meeting
Las Vegas, NV
Jim Rowland, FCAS, MAAA
Allstate Insurance Co.

2. What are Residual Auto/Property Markets?
The Residual Market consists of consumers who are unable to purchase insurance through the voluntary market due to a variety of factors such as driving history/lack of driving experience (auto), or proximity to coast/inadequate fire protection (property).
What gives rise to the need for Residual Markets?
Inability of insurance carriers to implement adequate pricing for specific risks due to:
Regulatory restrictions
Risk profile/appetite
Market dysfunction 2

3. Private Passenger Auto Plans3

4. Private Passenger Auto Plans – CW View
AIP 45
JUA 3 RF 2
Other 1
Sources: APISO

5. How does an AIP (Auto Insurance Plan) Operate?
Each voluntary auto writer in a state must fulfill its residual market obligation.
Auto Insurance Plan Services Office (AIPSO)
“Deals” out risks by state based on modified market share of each carrier
What options does a company have?
Create/maintain policy admin system to take assignments
Hire a vendor to perform these functions
Enter into a LAD (Limited Assignment Distribution) agreement

6. Market share may be modified through credit programs
New York Territorial Credit Example

7. Assigned Risk volume has declined dramatically!

8. Why has the market shrunk over this time period?
Several possible explanations exist:
The use of credit in voluntary market underwriting and rating plans has increased insurer ability to match price with risk
The advent of sophisticated pricing models utilizing GLMs and optimization routines has created an almost infinite number of price points
These price points cover far more risk scenarios than previous rating plans
Regulatory restrictions on price have not become more onerous (generally)
Could this change?
A rapid and dramatic change in frequency/severity, or in regulatory rate restrictions, could create a “shock” to the system, increasing involuntary market exposure.
The flexibility provided insurers to respond to these shocks will determine the long term impacts to the involuntary market population.

9. New industry paradigm needed
Low Volume + Current Model = Unsustainable Costs
Let’s Review:
Historically low volumes of involuntary business
Infrastructure was appropriate for 1990….not for today
Fixed costs per involuntary market policy exceed $1000 today!
New industry paradigm needed
One idea:
Expand AIPSO’s mission:
Deal the risks to itself
Obtain national carrier to service all of this business
Share underwriting results by state according to market share
Eliminate all individual carrier costs associated with servicing this market
Early estimate: Reduces industry costs by $50M per year

10. Questions?