Admitted and Non-admitted Assets
Admitted and non-admitted assets are the classifications of assets generally used by the insurance companies. For reporting of financial data, insurance companies use statutory accounting (STAT) set by the National Association of Insurance Commissioners (NAIC).
Risk is handed over to reinsurers by insurance companies in order to lessen their vulnerability to the risks connected with the policies that they endorse. The reinsurer is provided a fee, often a share of the premium in exchange for taking on some of the insurer’s risk. Thus, the reinsurer is responsible for claims made up to a specific level and is needed to express that it will be able to take care of those claims if losses occur.
The non-admitted balance denotes the share of unearned premiums and loss of wealth that do not add to the insurer’s legal statements, which is where the insurer values for any capital and surplus wanted to maintain its permit to carry on insurance business. Because the balance is non-admitted, the insurer cannot calculate the balance to its solvency ratio or any regulatory expected reserve level, meaning that the loss reserve linked to the non-admitted balance cannot add towards the general loss reserve. For this cause, insurance companies have an incentive to make reinsurers provide collateral.
A reinsurance company may be asked by insurers to provide assets as collateral as proof that the reinsurer will be fulfilling a claim made against the policy. The insurer’s surplus will increase if the reinsurer is asked to produce collateral and will reduce the non-admitted balance. A letter of credit (LOC) is typically used as the source of collateral by reinsurers and other captive insurance companies. A bank issues the letter of credit. The insurance company will handle the non-admitted balance as the loss reserve and draft the balance off if the ceding insurance company does not need the reinsurer to produce collateral to handle the non-admitted balance and the reinsurer becomes unbalanced.
The liquid assets which have a measurable value and can be used to liquidate to cover liabilities are termed as Admitted assets. The admitted assets can be both tangible or intangible. Anything that is owned works towards production value can be considered an admitted asset. Some common tangible admitted assets are real estate, cash, equipment, buildings, and expensive metal holdings. These assets of an insurance company are authorized by state law to be covered in the company’s financial statements, normally the balance sheet.
As policyholders invest a lot in and depend upon their insurance coverage, regulators are very stringent about the financial stability of insurance companies compared to other types of businesses.
The assets with economic values that could not fulfill policyholder obligations are termed as Non-admitted assets. These assets are usually difficult to convert into cash and also not easy to sell. The non-admitted assets can be looked upon as a source of collateral or used for the estimation of a company’s backing. Prepaid expenses, office furniture, and fixtures are some examples. Most of the non-bankable checks, intangible assets, and stock held as collateral for credits are non-admitted assets. However, each situation determines what passes as admitted or non-admitted assets.
Other examples of non-admitted assets that comprise of assets having goodwill, furniture, and fixtures, automobiles, and others are not included in order to produce a balance sheet that is very conservative. However, an incline in the portion of non-admitted assets to admitted assets suggests that a company may be putting money in unfruitful or risky assets. However, this case is not always true. To determine it, an insurance company’s financial’s must be closely examined to know if the share of non-admitted assets on the balance sheet is really an indicator of nonproductive or risky assets.
What are admitted assets?
The liquid assets which have a measurable value and can be used to liquidate to cover liabilities are termed as Admitted assets.
What are non-admitted assets?
The assets with economic values that could not fulfill policyholder obligations are termed as Non-admitted assets. These assets are usually difficult to convert into cash and also not easy to sell.
What are examples of non-admitted assets?
Prepaid expenses, office furniture, and fixtures are some examples of non-admitted assets. Most of the non-bankable checks, intangible assets, and stock held as collateral for credits are non-admitted assets. However, each situation determines what passes as admitted or non-admitted assets.