What Is Assigned Risk?

Assigned risk is when an insurance company is required, by state insurance law, to provide coverage for risk that may not find coverage in the general insurance marketplace. In order to compensate insurers for the potential losses associated with such mandated coverage, insurers will often pool funds and share the assigned risk.

Common examples include mandating that all drivers obtain car insurance or requiring businesses to purchase workers' compensation insurance.

Key Takeaways

  • Assigned risk is when the law mandates that an insurance company offer certain coverages.
  • In such cases, regulators will require insurance companies to pool together and accept the assigned risk, even if the insurers individually don’t want to provide a commercial policy.
  • Assigned risk allows the state to protect drivers who are able to purchase commercial policies and who may be involved in an accident with a risky driver.

Understanding Assigned Risk

In most cases, insurance companies choose who they underwrite insurance policies for, and this choice to insure is based on the risk profile of the individual or business applying for coverage. These considerations include the likelihood that a claim that results in a loss for the insurance company. The insurer will therefore price the cost of the policy it underwrites according to the potential severity of any losses. If a potential insured is deemed too risky, the insurer may not underwrite a new policy.

State insurance regulators recognize that insurers only want to underwrite policies that will be profitable, but also recognize that it is in the interest of the government that coverage be extended to groups that need protection but may not be able to obtain it in the general insurance market. To do this the regulator will require insurance companies that provide a particular line of insurance, such as workers’ compensation or automotive insurance, to participate in a state-sponsored plan that provides coverage.

Example: Motorist Coverage

For example, drivers are required to carry insurance with them in order to legally operate an automobile. This insurance is designed to cover claims made against the driver. In most cases, the driver’s record is in good shape, and insurers are likely to provide coverage. Some drivers, however, have poor driving records and may not be able to obtain coverage because they present too much of a risk. Insurance regulators will require insurance companies to pool together and accept the assigned risk, even if the insurers don’t want to provide a commercial policy. This allows the state to protect drivers who are able to purchase commercial policies and who may be involved in an accident with a risky driver.

"In some cases, you can apply to an automobile insurance plan or assigned risk plan by directly contacting your state's Department of Insurance," according to the website DMV.org, a private, non-governmental website. "Some states require that you apply to several car insurance companies before you apply for the state's car insurance plan. If each provider has denied you car insurance coverage, you'll be accepted into the plan. Typically, your signature on the application is enough to acknowledge that you have fulfilled this requirement."