Involuntary Markets and Geneneral Auto Insurance

Involuntary market keeps incentives for insurers to handle claims efficiently/h2>
Involuntary markets have long been a subject of intense interest for the insurance community and have frequently been studied by insurance experts.

A study by the National Association of Independent Insurers found that no single factor is solely responsible for creating a large involuntary market. However, there is a correlation between the size of the involuntary market and whether a state has a compulsory insurance law and prior approval of premiums (which requires regulatory approval before rate changes can take effect).

States with compulsory general auto insurance and prior approval laws have bigger involuntary markets. Thus it appears that high involuntary market populations are in large part made up not of the type of hard core bad driver that involuntary markets were originally intended to serve, but rather of inadequately priced business.

As evidence that various factors in the makeup of the auto insurance system—-as to whether a state has open rating, compulsory liability, no-fault and personal injury protection—influence the size of the involuntary market, the study points to Florida’s experience. In 1978 Florida instituted open rating, eliminated compulsory liability, and substituted a verbal threshold for no-fault and made personal injury protection mandatory. The result, as seen in the chart below, was a substantial reduction in the size of the involuntary market. By 1985 the Florida involuntary market had shrunk to a mere 6 percent of its 1977 level with only 36,475 policies written.

As to comparing types of voluntary general auto insurance market mechanisms, the study found that the “take-all-comers” mandate of reinsurance facilities had the greatest effect in driving voluntary non-standard insurers out of a market by preventing them from competing.

Another study of the relative merits of different types of involuntary market mechanisms, found that those that rely on pooling of premiums and losses—rather than on each insurer being responsible for its own policyholders’ premiums and losses as in assigned risk plans—-“can result in changes in rate making, accounting and investment philosophy that will generate significantly less income to insurers than is otherwise considered reasonable.”

Pooling arrangements, which remove the processing of risk from the hands of individual insurance companies, are far more likely to result in non-cost-based pricing, greater subsidies for the involuntary general auto insurance market, and attempts to recoup losses retrospectively rather than through prospective rate making.

In terms of consumer satisfaction with different types of mechanisms, the small amount of available research indicates that consumers are largely unaware of and unconcerned about the type of mechanism. The conclusion to be drawn, according to studies done in the late 1970s and early 1980s by the National Industry Committee on Automobile Insurance Plans (NICAIP), is that the type of mechanism has little impact on consumers. Consumers’ main concern and source of dissatisfaction with auto insurance is cost.


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