Learn the types of residual market mechanisms available in the various
states, including information about coverages, contacts, and factors to
consider when considering that route.
This article will provide a brief overview of the types of residual market
mechanisms available in the various states, the application process, 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 four monopolistic states
(North Dakota, Ohio, Washington, 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 46 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.
- 22 state plans are administered by the National Council on Compensation
Insurance (NCCI)
- 12 states have plans administered by a state rating organization or a
third party
- 14 states have a competitive fund that also serves as the market of last
resort
Residual Market
Mechanisms |
State |
Competitive Fund |
State Assigned Risk Mechanism |
State Assigned Risk Plan Admin. by NCCI |
Monopolistic State |
Alabama |
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Alaska |
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Arizona |
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Arkansas |
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California |
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Colorado |
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Connecticut |
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Delaware |
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District of Columbia |
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Florida |
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Georgia |
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Hawaii |
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Idaho |
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Illinois |
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Indiana |
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Iowa |
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Kansas |
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Kentucky |
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Louisiana |
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Maine |
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Maryland |
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Massachusetts |
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Michigan |
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Minnesota * |
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Mississippi |
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Missouri* |
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Montana |
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Nebraska |
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Nevada |
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New Hampshire |
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New Jersey |
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New Mexico * |
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New York |
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North Carolina |
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North Dakota |
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Ohio |
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Oklahoma |
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Oregon * |
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Pennsylvania |
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Rhode Island |
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South Carolina |
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South Dakota |
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Tennessee |
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Texas |
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Utah |
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Vermont |
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Virginia |
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Washington |
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West Virginia |
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Wisconsin |
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Wyoming |
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*Competitive fund does not serve as residual market mechanism.
Application Process
The application process for securing coverage is not uniform among residual
markets. Those funds administered by NCCI have a 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 NCCI policy form. 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 current NCCI 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 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 and 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 multistate 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.