Volatility Costs for an Assigned Risk Plan

The Massachusetts private passenger automobile insurance market is in poor condition. Thirty-four of the fifty-three companies that wrote insurance in the state in 1990 have left the state since then, while only three have entered. Of the 34 that left, 30 paid a large ‘buy out’ fee to leave the state. The reasons for this situation are complex, but they can broadly be explained by the market structure Massachusetts uses to handle high risk drivers. Over the next few years, a new market structure for handling these risks will be implemented. Our task is to model this new structure.