Workers Compensation Residual Market

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

*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.