Residual Market Pricing

Residual market plans often review their rates based on the experience of the plans themselves. The typical result is an indication for a large increase, which the regulator then judgmentally reduces. To the extent that equilibrium exists between voluntary and residual markets, it results from ignoring the indications. Plans’ experience can call for rate decreases as well as increases, especially with no allowance for profit. Indications for decreases are politically harder to ignore and could destroy the voluntary market if followed. Break-even residual market pricing, if truly followed, has unpredictable consequences on prices and market shares for the residual and the voluntary markets. This paper proposes an alternative to break-even pricing. With input from all concerned, a state should first establish specific goals for the residual market plan in terms of market share, burden on insureds in the voluntary market, and maximum surcharge for insureds in the plan. Regulators can then set plan prices at a consistent level above voluntary prices to meet the established goals.