Assigned Risk - Explained
What is Assigned Risk?
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Back To: INSURANCE & RISK MANAGEMENT
What is Assigned Risk?
An assigned risk refers to a poor risk, that is, a risk that is difficult to insure but an insurance company is required to provide coverage for in accordance with the state law. For instance, if a person such as an accident-prone driver is denied coverage because of their previous records but are required to be covered under the states' assigned risk plan, this is an example of Assigned Risk. Usually, assigned risks do not have coverage in the general marketplace but are assigned to be covered by insurers according to the state law.
How Does Assigned Risk Work?
The common definition of an assigned risk is a risk that insurance companies would not cover under normal circumstances but are forced to provide coverage for as stated by the law. Generally, when providing coverage for a party, the risk profile is evaluated in order to determine the cost of the policy. Given that assigned risks have greater risks, they are more expensive than other policies. In certain cases, an assigned risk is covered by insurance companies who charge more money given the degree of the underlying risk. In other cases, insurance companies merge to provide coverage for assigned risks.
Insurance regulators in different states realized that insurance companies are after clients or policyholders that will guarantee profit for the company. This is not the case with assigned risks because they entail greater risks and reduce the chances of profits. Given that insurance companies avoid providing coverage when an insured is deemed too risky, the state regulators require that companies must provide coverage for assigned risks. Assigned risks refer to a group of people who are not naturally catered for by insurance companies because of their high-risk tendencies, an accident-prone motorist or driver is a good example. State insurance regulators as part of ways to extend coverage to groups that would otherwise be rejected created the concept of assigned risk.
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