Assigned risk pools are state-sponsored organizations that allow people and businesses to obtain insurance who would otherwise find it difficult (or impossible) to do so. Assigned risk pools are structured around particular types of risks, such as auto, fire, workers compensation insurance, etc.
Automobile insurance is a prime example of how assigned risk pools work. Many states require automobile insurance. Some people, due to their driving record, the car they drive, where they live, or some other circumstance, cannot get insurance because no one will insure them. Well, the state cannot force an individual to comply with a law if that individual has no possible way of doing so. Therefore, the state must provide a way for a person to get insurance even though no one will insure them.
The Assigned Risk Insurance Providers
So, who provides the insurance under assigned risk plans? The answer: the same insurance companies which serve the rest of the industry. In providing this insurance, the state makes a simple calculation which involves determining the total amount of insurance written in the state. This figure is then broken down by insurance carrier. The state then knows what percentage of all the business each insurance carrier provides. Every insurance carrier is required to provide insurance to these otherwise uninsurable people in the same proportion that they provide insurance to insurable people that are not part of the assigned risk pool. For example, State Farm Property & Casualty is one of the largest writers of automobile insurance in the state of California. Therefore, State Farm provides a good share of the insurance to assigned risk people.
The state requires each insurance carrier to write assigned risk business in their respective proportion to continue to be able to sell insurance to the rest of the population in that state.
The names of some of these assigned risk pools for automobile insurance are: the California Automobile Assigned Risk Plan (CAARP), the Texas Automobile Insurance Plan Association (TAIPA), and the Maryland Automobile Insurance Fund (MAIF).
The Risk to a Premium Finance Company
A premium finance company assumes more exposure through the assigned risk business because of these three critical components:
- Assigned risk business has a higher frequency of default, aka, non-payment.
- The assigned risk business has a higher frequency of up-rates (the people are not forthcoming about their driving records or are involved in accidents and, as a result, the premium is increased mid-term which can leave the finance company with a greater loan balance than the available unearned premium).
- The assigned risk plans are administered by the state and as such, not subject to all the rules and regulations standard businesses are. The primary example of this is the rule of pro-rate versus short-rate calculation of unearned premium.
To put simply, short-rate return premium allows the carrier to keep more of the premium upon cancellation. Since a premium finance company collateralizes its loan with the unearned premium, if less is available, the finance company has a greater risk of a shortfall in the loan balance if the borrower stops paying. Since assigned risk business defaults more frequently, this makes this possibility of shortfall higher.
As with any situation when a premium finance company has a greater risk in making a loan, assigned risk business often times requires a higher down payment and sometimes a shorter loan term, namely fewer installments.
It is important to understand that not every premium finance company will take a higher down payment when financing an assigned risk policy. The reason they may not is simply due to competition. If one takes a higher down, the next one will decrease the down payment to capture more business. Eventually, they all reach rock bottom and going any further will result in losses too great for any finance company to withstand.