Assigned risk

Assigned Risk is a term used in the insurance industry to refer to a risk that an insurance company is required to cover by law. This typically applies to individuals or businesses that are considered high risk and may not be able to obtain insurance coverage in the regular market.

Overview

The concept of assigned risk was developed to ensure that all individuals and businesses have access to necessary insurance coverage, regardless of their risk profile. This is particularly important in areas such as auto insurance, where coverage is required by law.

In an assigned risk plan, insurance companies that operate in a particular state are required to accept a certain proportion of high-risk insureds, based on their share of the market. The specifics of how assigned risk plans operate can vary from one jurisdiction to another.

Assigned Risk in Auto Insurance

In the context of auto insurance, assigned risk plans are often referred to as "residual market" plans. Drivers who have a poor driving record, have been convicted of DUI, or have other risk factors that make them undesirable to insurance companies may be placed in the assigned risk pool.

The premiums for assigned risk policies are typically higher than for standard policies, reflecting the higher risk associated with these drivers. However, the rates are regulated by state insurance departments to ensure that they are not prohibitively expensive.

Assigned Risk in Workers' Compensation

Assigned risk is also a significant concept in workers' compensation insurance. Businesses that have a high rate of workplace injuries, or that operate in high-risk industries, may be placed in the assigned risk pool if they are unable to obtain coverage in the regular market.

As with auto insurance, the premiums for assigned risk workers' compensation policies are typically higher than for standard policies. However, the rates are regulated to ensure affordability.

Criticisms and Controversies

While the assigned risk system is designed to ensure access to insurance for all, it has been subject to criticism. Some argue that it unfairly penalizes safe drivers or businesses, who must pay higher premiums to subsidize the high-risk insureds in the assigned risk pool. Others argue that the system is open to abuse, with some high-risk insureds deliberately seeking to be placed in the assigned risk pool in order to take advantage of the regulated rates.

Despite these criticisms, the assigned risk system remains a key component of the insurance landscape in many jurisdictions, providing essential coverage for those who would otherwise be left uninsured.