What Is a Non-Assessable Policy?

A non-assessable policy is a type of insurance policy that cannot require the policyholder to pay additional funds to cover an insurer’s losses if the losses are greater than its reserves.

Key Takeaways

  • A non-assessable policy is a form of insurance that cannot make the policyholder pay additional funds to cover losses over the insurer's reserves.
  • These policies are common and frequently used in commercial line insurance, like homeowners and auto policies.
  • Often the insurance company offering non-assessable policies are owned by stockholders rather than by policyholders.
  • Depending on the state, insurance regulators sometimes attach limitations on insurers that provide non-assessable policies.
  • An insurer can sell both assessable and non-assessable policies in some cases.

Understanding Non-Assessable Policies

Non-assessable policies are the type of insurance policy that most people are familiar with. They are associated with commercial line insurance, such as auto policies and homeowners insurance. Most insurance policies are considered non-assessable policies, with the insurance company offering them owned by stockholders rather than by policyholders (as in 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 cannot 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 it can invest its dividends in. The reason for the limitations is to ensure that the insurer can effectively cover its liabilities with liquid assets since it cannot demand additional funds from policyholders to make up for losses.

Non-assessable policies are the most commonly found commercial line insurance offered by companies.

Special Considerations

In some cases, an insurer will be allowed to sell both assessable and non-assessable policies. In other cases, an insurer may not be able to sell non-assessable policies. An insurer with solvency issues in the past is likely to come under added scrutiny and may only be allowed to sell assessable policies.

Some auto insurance policies are accessible, and this lowers the premium cost for consumers. The downside is that if the company has a bad year for claims, policyholders may face a surcharge on their premium, an unpleasant surprise. This may not seem fair, that you should have to pay for the mistakes of others. But these types of policies do provide savings in premiums, and policyholders should view this as everyone being in it together to maintain their good driving records and succeed as a group.