Assessable Policy

Assessable Policy

An assessable policy is a type of insurance policy that may require the owner to pay additional funds to cover an insurer's losses if they are greater than its reserves. Assessable policies, sometimes referred to as assessment insurance, are commonly associated with mutual insurance companies, which are groups of individuals and businesses that pool resources to provide insurance coverage to members. An assessable policy is a type of insurance policy that may require the owner to pay additional funds to cover an insurer's losses if they are greater than its reserves. An assessable policy is a type of insurance policy that may require the policyholder to pay additional funds to cover an insurer's losses. Assessable policies are the opposite of non-assessable policies, which require the insurer to find other ways to find funds that its reserves do not cover.

An assessable policy is a type of insurance policy that may require the policyholder to pay additional funds to cover an insurer's losses.

What Is an Assessable Policy?

An assessable policy is a type of insurance policy that may require the owner to pay additional funds to cover an insurer's losses if they are greater than its reserves. Assessable policies, sometimes referred to as assessment insurance, are commonly associated with mutual insurance companies, which are groups of individuals and businesses that pool resources to provide insurance coverage to members.

An assessable policy is a type of insurance policy that may require the policyholder to pay additional funds to cover an insurer's losses.
They are associated with mutual insurance companies, which are groups of individuals and businesses that pool resources to purchase insurance coverage for members.
Assessable policies are the opposite of non-assessable policies, which require the insurer to find other ways to find funds that its reserves do not cover.
On the plus side, assessable policies usually charge policyholders less for protection.

Understanding an Assessable Policy

In the United States, most insurance companies are owned by shareholders and must turn a profit. As policyholders, we buy protection from these insurers but do not directly share in their profits or losses.

Some companies operate under a completely different model. A group of businesses might pool funds and form a corporation specifically to purchase insurance coverage for the group's members. The resulting corporation_ — called a mutual company or mutual insurance company — _ allows members to obtain protection against financial loss at a cheaper rate than if they had sought coverage on their own.

Mutual insurance companies are generally smaller and have less money available to settle claims than traditional insurers. As a result, some are permitted to tap policyholders_ — their co-owners — _for additional funds to meet their obligations, typically in the form of an additional annual premium payment.

Assessable Policy vs. Non-Assessable Policy

Most insurers are owned by stockholders rather than policyholders. As such, they offer what are known as non-assessable policies. Under this type of plan, the liability of the policyholder is limited to the amount of premium owed on the policy — the standard charge for financial protection.

In other words, if the insurer is unable to cover losses resulting from claims, it must then find funds from other sources, including its investments. Utilizing investment income and other assets to plug shortfalls means the insurer will be less profitable, with the insurance company's stockholders ultimately bearing the brunt of these losses.

State insurance regulators may place limitations on insurers that provide non-assessable policies. Such limitations typically apply to the amount of reserves the insurer must set aside to cover liabilities, the type and number of policies it is allowed to underwrite, and the kind of investments it can invest its dividends in. The limitations are to ensure that insurance companies are able to cover liabilities with liquid assets, as they are not allowed to demand additional funds from policyholders in order to make up for losses.

Important

An insurer that experienced solvency issues in the past is likely to come under added scrutiny, and may only be allowed to sell assessable policies.

Example of an Assessable Policy

Some auto insurance policies are assessable, resulting in a lower coverage costs for consumers. The downside is that if the company has a bad year for claims, policyholders may face the unpleasant surprise of being billed a surcharge on their premium.

Paying for the mistakes of others might not seem fair. However, these types of policies do provide savings in premiums. Policyholders should view this as everyone being in it together to maintain good driving records and succeed as a group.

Related terms:

Accounting

Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more

Asset

An asset is a resource with economic value that an individual or corporation owns or controls with the expectation that it will provide a future benefit. read more

Auto Insurance

Auto insurance is purchased by vehicle owners to mitigate costs associated with getting into an auto accident. Discover more about it here. read more

Insurance Coverage

Insurance coverage is the amount of risk or liability covered for an individual or entity by way of insurance services.  read more

Insurance Loss Control

Insurance loss control is a set of risk management practices designed to reduce the likelihood of a claim being made against an insurance policy. read more

Insurance Premium

An insurance premium is the amount of money an individual or business pays for an insurance policy. read more

Insurance Claim

An insurance claim is a formal request by a policyholder to an insurance company for coverage or compensation for a covered loss or policy event. The insurance company validates the claim and, once approved, issues payment to the insured. read more

Investment Income

Investment income is money derived from interest payments, dividends, or capital gains realized on the sale of stock or other assets. read more

Liability

A liability is something a person or company owes, usually a sum of money. read more

Liquid Asset

A liquid asset is an asset that can easily be converted into cash within a short amount of time. read more

show 11 more