The Effect of Residual Market Depopulation on Loss Ratio

The workers compensation residual market has been shrinking in size. Now that rate adequacy has improved, insurance carriers are willing to voluntarily write some of the risks which in previous years would have had to seek coverage in the residual market. The loss ratios for the risks leaving the residual market are, on average, higher than for the risks which are already written in the voluntary market, but lower than for the risks which remain in the residual market. This depopulation has the effect of increasing the loss ratio for the remaining group of residual market risks and increasing the loss ratio for the new group of voluntarily written risks. This study quantities the effect of depopulation on the loss ratio of the residual market.