Residual markets: FAIR plans, assigned risk and state pools

Why residual markets exist

The NAIC's file-and-use model rating law defines a residual market mechanism as an arrangement, voluntary or required by law, through which insurers equitably share coverage for applicants who cannot obtain insurance through ordinary methods.

Two pressures create the need:

• Compulsory or essential coverage. Auto liability and workers' compensation are generally required by law, and mortgage lenders require property insurance. If the voluntary market will not write a risk, there has to be somewhere else for it to go.
• Availability problems. Insurers may restrict writing in areas exposed to catastrophe, urban decline or rising costs. The NAIC links the original property FAIR plans to the Urban Property Insurance Protection and Reinsurance Act of 1968, which addressed insurance availability problems in deteriorating urban areas.

Because voluntary insurers are usually the funding source, residual markets are designed to be a backstop, not a competitor. Rates, eligibility rules and coverage limits all reflect that.

Property: FAIR plans and state insurers

FAIR plans

Fair Access to Insurance Requirements (FAIR) plans are state-mandated property insurance programs for owners who cannot get coverage in the regular market. The NAIC reports that as of October 2024, 33 states had some form of FAIR or residual market plan, varying widely in size, scope and funding. Coverage is usually basic: dwelling coverage, with contents and other structures often optional, and liability generally not offered. The NAIC notes that FAIR plan coverage is typically more expensive than coverage in the regular market.

Most FAIR plans are associations of the insurers licensed to write property insurance in the state, not state agencies. Each member shares in the plan's profits, losses and expenses in proportion to its share of the state's market. The California FAIR Plan is an example. It was established by statute in August 1968 under California Insurance Code sections 10090 and following, it says it is not a state agency or public entity and receives no taxpayer funding, and its members are the licensed property and casualty insurers writing basic property insurance in California.

That membership has real consequences. When losses exceed a plan's resources, it can assess its members. In early 2025, after the Los Angeles wildfires, California's commissioner approved a $1 billion assessment on FAIR Plan member insurers, and the department issued Bulletin 2025-4 describing how members could seek prior approval, through a rule-change application, to recoup part of their assessment from their own policyholders through temporary supplemental fees.

Beach and windstorm plans

Several coastal states have separate beach or windstorm plans for coastal property the voluntary market will not write. The NAIC describes them as a type of FAIR plan and notes that in some areas they have insured more risks than the voluntary market.

State-created insurers

Some states have gone further and created a government insurer. Florida's Citizens Property Insurance Corporation was created by the Legislature in August 2002 as a not-for-profit, tax-exempt government entity to provide property insurance to eligible owners who cannot find coverage in the private market. Florida law requires Citizens to levy assessments on most Florida policyholders if it runs a deficit after a severe storm or series of storms, and promoting depopulation is one of its stated strategic priorities.

Auto: assigned risk plans and other mechanisms

States provide ways for drivers rejected by the voluntary market to get the liability coverage the law requires. The main forms are:

• Automobile insurance plans (assigned risk plans). Applicants are assigned to insurers writing auto in the state, usually in proportion to each insurer's market share, and the assigned insurer issues and services the policy.
• Joint underwriting associations (JUAs). A small number of servicing carriers issue policies on behalf of an association, and results are shared among all insurers.
• Reinsurance facilities. Insurers write the policy but can cede risks they would not choose to keep to a facility whose results are shared.
• Commercial automobile insurance procedures (CAIPs). Servicing carriers write commercial auto risks for the plan.

These mechanisms are commonly run by a governing committee under a plan of operation approved by the state's insurance regulator. AIPSO, a nonprofit service organization, reported in its 2024 annual report that it was plan manager for residual market mechanisms in 37 states and the District of Columbia, and that it is a licensed rating or advisory organization in more than 45 states.

Workers' compensation residual markets

Because employers are generally required by statute to carry workers' compensation, every state needs a way to cover employers the voluntary market declines, whether because of size, newness, loss history or hazardous operations. NCCI describes the options states use: a state fund, a joint underwriting association, an assigned risk reinsurance plan, NCCI's Workers Compensation Insurance Plan, or another mechanism.

In the states where NCCI is the plan administrator, it processes applications, determines eligibility, assigns risks and oversees the selection of servicing carriers, which the state regulator makes final after a bidding process. Every carrier writing workers' compensation in those states shares in the residual market, either by reinsuring the pooled business in proportion to its voluntary market share or by writing assigned risks directly. NCCI also administers several workers' compensation reinsurance pools, including a national pool that many of these states use.

How residual market rates and filings work

Residual market rates are filed with the state like other rates, but who files and how they relate to the voluntary market differ:

• The plan files. Plans usually file their own rates, rules and forms, often through a service or rating organization. AIPSO says it develops rates and rules designed specifically for the residual market, presents indications to plan governing committees and files rates and rules with regulators on their behalf.
• Stricter review is common. States often apply prior approval to residual market rates even where voluntary rates are under a competitive system. The NAIC file-and-use model, for example, requires residual market rates in mechanisms insurers must join to be approved before use; see Prior approval, file-and-use and use-and-file.
• Relationship to voluntary rates. A residual market priced below the voluntary market grows, because buyers and agents move business into it. Plans therefore aim for rates that are actuarially sound for the higher-risk business they write, and state law or the plan of operation may address how plan rates compare with voluntary rates. The NAIC notes that FAIR plans were designed with rates commensurate with risk, but that their mission has broadened in some states toward affordability and coastal economic development, which creates tension with that aim.
• Member insurer filings. Insurers sometimes need their own filings because of the residual market, such as rules to recoup approved assessments, as in California, or rates and forms for policies taken out of a plan.

Depopulation

Depopulation means moving policies out of a residual market and back to voluntary insurers. Common tools include take-out programs, where private insurers offer to assume plan policies, sometimes with incentives; services that match applicants with voluntary insurers before they enter the plan; and eligibility rules that keep risks with an acceptable voluntary offer out of the plan.

Citizens lists depopulation as a strategic priority. In workers' compensation, NCCI runs a service that matches employers with voluntary carriers before they enter the residual market, a take-out credit program that gives carriers credit for writing residual market risks voluntarily, and lists of expiring residual market policies for carriers to review.

Why filers watch residual market growth

• Assessment exposure. Members of a plan share its deficits. Large plan losses can lead to assessments on voluntary insurers, and recouping them may require filings.
• Regulatory attention. A growing residual market tells regulators the voluntary market is restricting availability. That can bring closer scrutiny of rate filings, non-renewals and underwriting restrictions, and new rules or bulletins aimed at availability.
• Competitive signals. Plan rate changes and eligibility rules affect which risks voluntary carriers can win, and take-out programs can be a source of new business.
• Market share obligations. Assigned risk quotas and pool participation usually follow voluntary market share, so growing in a state's voluntary market raises a carrier's share of its residual market.

Where a state publishes them, plan rate filings and their support can be found in SERFF Filing Access; see What is SERFF?.