Residual Market Facilities (Insurance)
Residual Market Facilities (Insurance) : "The intensity and frequency of hurricanes has led some states to establish certain insurance facilities to fund hurricane losses. Some of these facilities provide primary coverage directly to homeowners who cannot or will not purchase coverage from private insurers in the 'voluntary market.' These state-sponsored plans are known as 'residual markets' facilities". 112 (FinancialServicesRoundtable, Nation Unprepared 2007,46) "There are at least two policy problems posed by these facilities, however. One issue relates to the fact that residual market insurers tend to offer catastrophe coverage at subsidized rates, which means that states (and thus taxpayers) can be frequently called upon to pay a portion of the claims losses that exceed the insurer's reserves. In addition, subsidized rates reduce incentives for mitigation (since they typically do not reward such investments with actuarially appropriate insurance premium discounts). A second issue is one of fairness: typically, anyone can purchase insurance from the residual facility, which in the past has meant that some homeowners who could easily afford coverage in the voluntary market have been able to take advantage of subsidized rates in the residual market". (Ibid, p. 49)
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