What is the purpose of the residual market in insurance?

The purpose of the residual market in insurance is to serve as a last resort for coverage. This market specifically exists to provide insurance options to individuals or businesses that are unable to obtain coverage through the standard insurance market due to their high-risk profiles. Examples of high-risk situations include individuals with a history of frequent claims or those living in areas prone to natural disasters.

The residual market ensures that these high-risk applicants can still access essential insurance protection, thus promoting financial responsibility and community stability by avoiding situations where individuals do not have insurance at all. By functioning as a fallback option, the residual market plays a crucial role in maintaining a balance in the insurance industry and providing a safety net for those who may otherwise be left without coverage.

In contrast, the other options do not accurately represent the primary function of the residual market. Optional coverage for high-risk individuals focuses on potentially enhanced services rather than the safety net function. Assessing financial stability is a task aligned with regulatory oversight, while regulating insurance companies does not directly pertain to the concept of providing coverage for high-risk individuals.