DEFINITION of 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 the insurer’s reserves. These policies are the most commonly found commercial line insurance policies offered.
BREAKING DOWN Non-Assessable Policy
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 the case of a mutual insurance company).
How Non-Accessible Policies Work
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.
In some cases an insurer will be allowed to sell both assessable and non-assessable policies, and in other cases an insurer may not be able to sell non-assessable policies. An insurer that has had 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.