Navigating the Workers Compensation Residual Market
November 2002
Christine Fuge overviews the types of residual
market mechanisms available in the various states, including information about
coverages, contacts, and factors to consider when considering that route.
by Christine Fuge
IRMI
Residual market premiums began to rise in 2000, and that trend has accelerated
this year and will likely continue for the foreseeable future. This trend is
driven by a very tight voluntary market and the fact that the residual markets
must offer statutory limits to policyholders.
This article will provide a brief overview of the types of residual market
mechanisms available in the various states, contact information, the coverages
available, and some factors to consider when deciding whether or not to go the
residual market route (when there are other acceptable options available).
Types of Residual Markets
Every jurisdiction makes workers compensation insurance available to all
employers who are required to purchase it. In the five monopolistic states (North
Dakota, Ohio, Washington, West Virginia, and Wyoming), all employers except
those authorized to self-insure must purchase workers compensation insurance
from the state fund—and the state fund must provide coverage to all eligible
employers. However, in the other 45 states and the District of Columbia, employers
are generally expected to buy workers compensation insurance from private insurance
companies, which are free to offer the coverage or not as they see fit.
There are basically three types of residual market mechanisms (not including
the monopolistic state funds):
- An assigned risk mechanism administered by the state or an organization
other than NCCI on its behalf
- An assigned risk plan administered by NCCI on behalf of the state
- A plan offered by the state’s competitive fund
The chart below provides a state-specific recap of the type of residual market
mechanism used in the various jurisdictions. The overall breakdown is as follows:
- 19 state plans are administered by the National Council on Compensation
Insurance (NCCI)
- 12 states have plans administered by another third party
- 14 states have a competitive fund that also serves as the market of
last resort
Residual Market Mechanisms
Table
Accessing the Residual Markets
Accessibility to the state plans is varied, but a listing of addresses, phone
numbers, and Web sites (where applicable) can be found in the Resource Directory on IRMI.com.
Select "WC assigned risk plans and pools" from the menu, and choose to view
the residual market contact information by state or in alphabetical order.
The application process for securing coverage is not uniform among residual
markets. Those funds administered by NCCI have mechanism for applications to
be submitted electronically, as do many of the other state funds. Check with
the individual fund to see what application alternatives are available. Usually
the residual market requires evidence of declination of the organization by
voluntary market insurers before the entity can apply to the residual market.
In most instances, coverage is not bound until the residual market mechanism
receives a deposit premium along with a completed application.
Overview of Coverages Provided
Policy forms used by the state residual markets vary. Those administered
by NCCI use the policy form introduced by NCCI in 1984. Most other residual
markets use a form similar to the one developed by NCCI, while a few use a policy
that deviates significantly from the 1984 form (California is an example of
such a deviation).
Additional coverages available from the residual market tend to be pretty
basic. State funds administered by NCCI offer increased limits for employers
liability, coverage for federal and maritime acts, a waiver of subrogation endorsement,
an alternate employers employers endorsement, and a limited form of other states
coverage. Other state funds provide many of these same additional coverages.
The other states coverage provided by the other residual markets is quite varied
and should be reviewed carefully when coverage is placed.
Is the Residual Market the Right Choice?
This question becomes rhetorical for organizations that truly have no other
choice, where the residual market is the last option. The loss of reinsurance
capacity in the hard market has caused employers with other insurance options
to consider the residual market as a program option. Since the residual markets
must offer statutory limits, they offer a refuge of sorts for those employers
who have been unable to secure statutory coverage through an excess policy for
a self-insured program and have decided to return to the traditional marketplace.
There are some drawbacks to using the residual market to consider when viewing
it as an option. For multi-state accounts, there will be the additional administrative
burden of working with multiple insurers in the various states. The coverages
offered by the funds are no frill, and the other states coverage provided by
the funds is not uniform in wording or as comprehensive as that provided by
the NCCI endorsement used in the voluntary market. At least one state, Florida,
has an assessable fund that allows policyholders to be charged for deficits
the fund may experience.
Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author’s employer or IRMI. This article does not purport
to provide legal, accounting, or other professional advice or opinion. If such advice
is needed, consult with your attorney, accountant, or other qualified adviser.