The Residual Market

Remember the story of the guy who bought a motor home. He was particularly impressed by the cruise control feature.  He set out on a trip, got the r/v on the highway, set the cruise, and stepped back to the kitchen area to make some coffee… Yep.  You know what happened next.

Cruise control is great but there are some things it  can’t do.  

Insurance is great but there are some things it can’t do.

What insurance can do is provide financial protection for most home owners, drivers, individuals. Insurers determine the cost of the protection, customers pay the premium. Call this the voluntary market – willing insurers and willing buyers.

This works for the vast majority of the population.

But not for everyone.  Insurance can’t meet every need.  

Some would-be customers don’t qualify in the voluntary market.  Chronic drunk drivers don;t qualify for auto insurance. Homes in need of repair, presenting fire hazards don’t qualify for fire insurance. For health insurance, people who have been diagnosed with a serious health issue won’t qualify (more on pre-existing conditions in a coming article). Some people just can’t afford the premium.

This is the residual market.  Willing buyers, perhaps, who don’t qualify. Or who don’t have the money to pay.

What to do with the residual market? Insurance is important. What to with these uninsurables?  

The answer is not insurance.  

With this kind of problem, society’s values must determine the solution.  For the bad driver, deny the license to drive, for everyone’s safety.  For the unfit house, perhaps community action can make repairs, bring it up to code.  For the already-ill, medicaid or a similar government funded program may be the answer. 

Why not insurance?  Insurance is a break-even concept – the premiums paid in cover the claims paid out, plus administrative expenses.  

Situations are deemed uninsurable when no level of premium is sufficient to cover the claims/expenses. Uninsurable situations should be handled outside the insurance arena.

by Dennis