Assessable Policy

What is 'Assessable Policy'

A type of insurance policy that may require the policyholder to pay additional funds to cover an insurer’s losses if the losses are greater than the insurer’s reserves. Assessable policies are most commonly associated with mutual insurance companies, which are formed by a group of individuals and businesses to provide insurance coverage to members.

BREAKING DOWN 'Assessable Policy'

Individuals and businesses are likely to be familiar with large insurance companies that provide a variety of different types of policies. In some cases, however, a group of businesses may pool funds together and form a corporation specifically to purchase insurance coverage for the group. The corporation formed is called a mutual company or mutual insurance company, and allows members to obtain insurance coverage at a cheaper rate than if they sought coverage on their own.

Most insurance policies are considered non-assessable policies, and are owned by stockholders rather than by policyholders (as in the case of a mutual insurance company). A non-assessable policy limits the liability of the policyholder to the amount of premium owed on the policy. If the insurer is unable to cover losses resulting from claims it must find funds from other sources, including its investments. Because utilizing investment income and other assets to cover losses means that the insurer will be less profitable, the insurance company’s stockholders will ultimately be forced to absorb losses.

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