The number of policies in the U.S. residual market fell slightly in 2012 but demand remains high—threatening state finances and the pocketbooks of all residents.
An updated report from Robert P. Hartwig, president of the Insurance Information Institute, says that although total U.S. residual market policies-in-force were about 3.2 million from a record 3.3 million in 2011, "this market of last resort remains the market of first choice for many vulnerable, high-risk coastal properties." 
The residual market was originally intended to provide insurance to high-risk policyholders who can't get coverage from the standard market. But many—such as Florida Citizens Property Insurance Corp.—have ballooned to become major insurance providers. Florida Citizens is the largest provider of property insurance in Florida.
The reason? Hartwig says many of these residual insurers do not charge rates to match the risk taken, which is typically the least desirable types of business. As a result, total exposure in what are commonly known as FAIR (Fair Access to Insurance Requirements), Beach and Windstorm plans—as well as two state-run companies in Florida and Louisiana—was more than $818 billion in 2012, which was one of the worst years on record for catastrophes.
Total exposure in 2012 was down from a high of about $884.7 billion in 2011 but it is remains 1,396 percent higher than in 1990, when total exposure was $54.7 billion, according to the report.
The residual plans were initiated originally to given urban and coastal homeowners option, but Hartwig says the "distinctions are blurring." This makes it difficult to compare year-to-year, but it is clear the plans are growing rapidly. Furthermore, the rise in coastal properties, fuels residual market growth. Residents of the Atlantic, Gulf and Hawaiian Islands make up nearly two-thirds of the total U.S. population.
However, policyholders and taxpayers—even those living inland—could be on the hook should a residual insurer fail to have the funds to pay claims from a catastrophe. These insurance mechanisms have the ability to assess residents to pay claims.
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