AD Banker Comprehensive Practice Exam

What type of market provides coverage of last resort for individuals or businesses rejected by insurers?

1. Reciprocal

2. Reinsurance

3. Residual

4. Self-insured

The correct answer is: Residual

The correct answer identifies the concept of a market that serves as a safety net, providing coverage to individuals or businesses that have been turned away by traditional insurers. This type of market, known as a residual market, exists specifically to ensure that those who cannot obtain insurance through standard channels still have access to necessary coverage. In a residual market, the pool of risks includes those deemed too high for regular underwriting by insurance companies. This might be due to various factors, such as a history of claims or specific risk characteristics that make insuring these entities undesirable for providers. By offering a residual market, the insurance industry ensures that essential coverage is available, thereby protecting individuals and businesses from the consequences of being uninsured. Understanding this framework highlights the purpose and importance of residual markets in the overall insurance landscape, ensuring that no individual or business is left without essential insurance protection simply because they have faced rejection from standard insurers.