Assessable Policy

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.

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.

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.