Insurance for High-Risk Drivers

High-risk drivers present a special problem: insurance companies do not want to insure them because of their risk, but the states, which regulate insurance companies, want high-risk drivers to be insured because otherwise the victims of any accidents that they cause will not be compensated. As a result, states have developed various strategies to solve this particular problem.

High-risk drivers are considered those who have poor driving records, who were convicted of drunk driving, and teenage drivers, a group that has one of the highest accident rates. Generally, high-risk drivers must obtain insurance in what is called the shared market (aka residual market), which refers to a market in which all the insurance companies that do business within a state must participate.

High-risk drivers can only get insurance through these shared market plans if they are unable to obtain insurance in what is sometimes called the voluntary market.

The shared market is generally structured in 4 different ways: assigned risk plan, joint underwriting association, reinsurance facility, and specialty auto insurance.

Most states use an assigned risk plan (aka automobile insurance plan) that requires insurance companies to participate in offering insurance to high-risk drivers based on the total volume of auto insurance that they write within the state. So if a particular insurance company writes 10% of the automobile insurance plans within the state, then it is assigned 10% of the high-risk drivers. Naturally, the premiums in the assigned risk group are much higher than for safe drivers purchasing regular insurance – often, 2 to 3 times the average premium charged to safer drivers in the regular market, but at least the high-risk drivers can get coverage at a lesser price than they would otherwise be charged.

The disadvantage to assigned risk plans is that insurers still suffer underwriting losses because even the higher premiums do not cover the losses associated with high-risk drivers. Hence, insurance companies must offset those losses by charging higher premiums to safer drivers than would otherwise be required. Also, high premiums cause many high-risk drivers to go without insurance, thereby potentially becoming a financial calamity to victims of their accidents.

Although all auto insurance companies operating within the state must participate in the assigned risk plan, each insurer issues the policy, performs all the services required in implementing the policy and pays the claims.

Some states have set up a joint underwriting association (JUA), which follows the assigned risk plan, but the premiums paid by high-risk drivers goes into a common pool and each company must pay its pro rata share of losses and expenses of the pool. However, only a certain number of the largest insurance companies are selected to service the accounts and to pay the claims, but all insurers share in the underwriting losses.

Some states use a reinsurance facility, which is like a JUA in that a reinsurance pool is established that receives contributions from all the insurance companies operating within the state. All the insurance companies operating within the state must accept all drivers, regardless of their driving record. However, the insurance company decides whether to place it in the reinsurance pool or accept the driver as a regular customer. Even if the driver is placed in a reinsurance pool, the insurance company that issued the policy also services the policy.

Specialty auto insurers are insurance companies that specialize in insuring high-risk drivers by charging high premiums for the minimum coverage required by the state. The premiums charged are contingent on the individual's driving record, including the number of accidents and moving traffic violations, usually over the past 3 years.