Since there is no "take-all-comers" rule, insurers would simply reject bad risk, creating a residual market where risk cannot find insurance in voluntary market. Would a Residual Market be a valid answer?
If we didnt have a residual market would RSPs work?
Basically insurers would chose not to write bad risks as there is no consequence to turning them down and there would be no need for an RSP. However since there is a residual market in place where financial performance will be shared by the industry anyways this changes the equation. Now insurers will have to share the cost of bad risks regardless and so they may as well earn profit from their operations (by having acquisition expense & operating/claims expense lower than the RSP expense allowance).
In my eyes an RSP would not function properly without a residual market already in place. Does this make sense/ sound correct or am I missing something?
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That's what sample answer 4 says
If we didnt have a residual market would RSPs work?
Basically insurers would chose not to write bad risks as there is no consequence to turning them down and there would be no need for an RSP. However since there is a residual market in place where financial performance will be shared by the industry anyways this changes the equation. Now insurers will have to share the cost of bad risks regardless and so they may as well earn profit from their operations (by having acquisition expense & operating/claims expense lower than the RSP expense allowance).
In my eyes an RSP would not function properly without a residual market already in place. Does this make sense/ sound correct or am I missing something?
That's right. An RSP is solely the consequence of a residual market. The main reason for the take all comers rule is that auto insurance is mandatory