What is Residual Market Insurance?
Residual market auto insurance programs exist to insure high-risk drivers. You might also hear them called “shared” or “involuntary” auto insurance programs, because major auto insurance companies must be involved in these programs and must take on a percentage of these risks. They do not have a choice in the matter and cannot opt-out of these programs.
Like most other auto insurance topics, residual market insurance is complicated. We’ll break it down for you today, though. This article discusses:
- A definition of residual market insurance
- Voluntary vs. involuntary insurance markets
- An introduction to risk group rating
- Examples of high-risk drivers who need residual market insurance
- How to shop for residual market insurance online, over the phone and in-person
- Is there a list of insurers who take part in residual market auto insurance?
- Ways to improve your risk rating and get cheaper auto insurance
Let us start with definitions.
Residual Market Insurance Defined
According to the Insurance Information Institute (III), “Many different programs are in place across the United States [to] provide insurance to high-risk policyholders who may have difficulty obtaining coverage from the standard market.”
In short, a state government will force auto insurers to accept high-risk drivers. States do this because they require all drivers to maintain auto insurance, even if they are known to be unsafe or high-risk.
Auto insurance companies don’t prefer these drivers. In fact, they would rather not accept those risks at all. But, for business in said state, the most popular providers must accept their share of high-risk clients. The numbers vary from one state to the next, but generally, 1% of their auto insurance business must be from high-risk clients.
Voluntary vs. Involuntary Insurance Markets
All insurance companies have preferred target demographics and ideal risk groups. Put plainly, insurers specialize in certain types of risks, and they offer better deals to consumers in those groups.
You can usually tell by their advertising which types of clients an insurer prefers. These are their voluntary markets; they are not part of residual market insurance programs.
Ad Campaigns for Voluntary Insurance Markets You May Recognize
For instance, consider Progressive’s “Home Auto Bundle” advertising campaigns. Progressive is targeting customers with multiple lines of insurance, specifically home and auto. They are voluntarily spending a lot of money to attract these clients with discounts for bundled home and auto products.
From Progressive’s viewpoint, these customers are a good risk to accept, because they have some assets. These customers may have families and are most likely employed. Customers in their preferred target markets are over age 30 and married.
These ad campaigns do not target young, unsafe, or unreliable drivers.
Another example is GEICO’s advertising, you know, they feature an adorable gecko. These ads target price-sensitive drivers. One can assume GEICO is looking to attract younger, or less-affluent individuals with offers of “saving 15% or more by switching to GEICO.” Nothing in their advertising suggests a homeowner will get a better deal by bundling products.
Insurers Do Not Advertise Residual Market Auto Insurance Programs to Consumers
Every major auto insurance company in your state is likely involved in residual market insurance programs. Participation is mandatory.
In essence, the state government forces the big brands to offer insurance to drivers who are difficult to insure. Usually, they must do at least 1% of their overall auto insurance business with difficult-to-insure drivers. But they do not care to do more than what is required by law, so they do not advertise these programs.
Still, residual market insurance policies exist. Let’s talk about how drivers get placed into these high-risk categories.
An Introduction to Risk Group Rating
Auto insurers divide their clients into risk groups based on many factors. Depending on your state, these include your:
- Neighborhood or zip code
- Driving experience
- Claims history
- Insurance history (lapses, cancelations and non-renewals)
- Credit score
The vehicle you drive matters, too. Insurers pay close attention to the make and model of your vehicle, the average costs to repair it, and theft statistics.
High-risk vehicles include sports cars, very heavy vehicles capable of causing damage (like electric vehicles), and autos that are often stolen.
Examples of High-Risk Drivers Who Need Residual Market Auto Insurance
An insurance company may consider you high risk for these reasons:
- A history of speeding tickets
- An unsafe driving record
- DUI / DWAI on your record
Factors that make a consumer “high risk” are sometimes out of our control. For instance, gender and age play important roles in your risk rating. Remember that insurance companies have a century of auto accident data to consider, and they share statistics with other insurers.
For example, it is statistically proven that young males are more likely to make risky decisions when driving. So, even the most conscientious young man will pay slightly more for auto insurance than a female of the same age.
Seniors pay more, too. A 75-year old male may pay 21% more than his 55-year-old counterpart. From the insurers view, this is because seniors may have reduced vision, less overall physical fitness, and may make decisions slowly.
Ultimately, sometimes people discover they need residual market auto insurance when they call around for quotes and have a hard time buying an affordable policy. Let’s illustrate with two examples.
Robert’s Awesome Inheritance and the Residual Insurance Market
Imagine a 22-year-old college student, Robert. He’s currently living on-campus and doesn’t own a vehicle, so he doesn’t have any insurance. It’s a good thing, too, because Robert made some poor choices as a teenager and got arrested for two DUIs in his parents’ car.
No insurance company is actively looking for Robert’s business, he is a high-risk driver.
One day, he wakes up to a call from an attorney. Robert just inherited his grandfather’s custom 2023 Dodge Challenger Hellcat. It’s worth $100,000, has 707 horsepower, and cruises at 150 mph. “Come pick it up,” the lawyer says.
Now, Robert is an insurance underwriter’s worst nightmare. Not only is this an expensive, fast ride, it’s also a coveted vehicle at risk of theft.
Robert contacts the usual insurance companies that advertise in his state. They are all reluctant to accept his business. So, rather than offering him a competitive price, they offer extremely high rates. As a college student, Robert cannot afford $400 a month to insure this car, but he needs to have insurance.
This is where residual market auto insurance policies come into play. In a moment, we’ll explore how to shop for them. Let’s think about another instance where a consumer may find themselves in need of residual market insurance.
Robert’s Grandmother Annette May Also Need a Residual Market Auto Insurance Policy
Newly widowed Annette is a senior citizen. When her husband passed away, she struggled to pay bills for a while, and missed some credit card payments. Her vision and hearing aren’t what they used to be, and she’s no longer a confident driver.
Her financial struggles continue when her auto insurance is canceled due to non-payment, because her credit cards are canceled. Everything snowballs out of control because she was receiving a discount for bundling her home and auto insurance policies with one insurer. They drop her auto insurance, and her property insurance increases as well.
Thanks to issues like her age, credit, and insurance cancelations, Annette may also find herself looking for auto insurance via the residual insurance market, even though she’s always been a safe driver with an outstanding record and no claims history.
How to Shop for Auto Insurance via Involuntary Markets
If Rob and Annette approach the popular auto insurance companies in their state, they will get quotes for uncomfortably high premiums. That’s because insurers don’t have an “appetite” for these risks. However, they can look for policies through the residual insurance market.
Call a Local Insurance Agent You Trust and Ask About Residual Market Insurance Policies
If you’re a consumer like Robert or Annette, you could call an insurer you already trust. If you have a local agent, contact them and explain your position. They might not be able to provide you with a quote, but they can direct you to a “partner” or “subsidiary” of their insurance company that deals with these risks.
This should be your first course of action if you had a policy bundle, like the ones advertised by Progressive, because you won’t lose your multi-line policy discounts. If you are a consumer like Annette, who may lose property insurance discounts, this could save you some money.
Know that smaller, less popular insurers aren’t always forced to take part in the residual insurance market. If your trusted insurance agent cannot help you, it’s time to get online.
You Can Find Residual Market Auto Insurance Online
The best way to search for residual market insurance online is to visit your favorite search engine and plug in some specific. You can try a few different searches using phrases like:
- Cheap auto insurance for high-risk drivers in [your state]
- Involuntary auto insurance policies in [state]
- Residual market auto insurance in [city]
Your results will include insurers who are actively seeking this type of business.
Is There a List of Insurers Who Offer Residual Market Auto Insurance Policies?
No, not exactly. Auto insurance companies must share the responsibility of insuring high-risk drivers every year. But once the requirement is met, they don’t actively seek this type of business. In other words, it would be folly to list a bunch of insurance companies writing these risks today, because next month they might change.
However, we do know that all the most popular “heavy hitters” in the industry are forced to take part in these programs. So, we compiled a list of the most prominent companies based on their share of the US auto insurance market. You can be confident they all accept this type of business at some point during a given year.
The Most Popular US Auto Insurance Brands as of 2023
Because they are popular, these auto insurance companies are very likely to offer residual market insurance (possibly through a subsidiary) at some point:
- State Farm
- Liberty Mutual
- American Family
You can always contact them directly for a quote for auto insurance and explain your needs. You might need to try a few different agents to get a quote, so don’t give up. There is auto insurance out there, you just need to do the legwork to find it.
Of course, most consumers would rather avoid finding themselves in this situation. Let’s talk about how to avoid recognition as a high-risk driver, and steps you can take to lower your insurance costs should you discover yourself in this position.
How to Avoid High-Risk Ratings
Some of these points will seem like common sense, but they shouldn’t be omitted. To avoid a high-risk rating, you should:
- Drive safely, obey speed limits and avoid distracted driving.
- Take defensive driving courses or courses specifically for senior drivers.
- Maintain your auto insurance carefully, make sure insurance premiums are paid on time so you don’t face cancelations.
- Consider buying driver insurance even when you don’t have a car (so you aren’t uninsured for long.)
- Don’t allow points to accrue on your license, in states where this applies. Take driving courses if that means you’ll reduce the number of points on your license.
- If you have a criminal record, some states will allow you to seal the records or have them expunged.
- Pay attention to your credit rating. Some states allow insurers to use this information when calculating your premiums.
In a case like Robert’s, above, some qualities that make him high-risk cannot be changed. He cannot change his age, for instance. And his history of DUIs may linger on his insurance record for up to 10 years, depending on his state.
While insurance does exist for drivers in his situation, as a college student with little income, he will struggle to find affordable insurance. He may need to sell that car or store it for a time, and drive a slower, cheaper, less dangerous vehicle.