In the business world, admitted assets are the economic resources available to a business. In insurance, admitted assets are liquid assets with measurable value that can be liquidated to cover liabilities.
Admitted assets can be tangible or intangible assets. Essentially, anything that works towards production value and is owned can be considered an admitted asset. Common tangible admitted assets include cash, buildings, real estate, equipment, and precious metal holdings. Common intangible admitted assets include franchise holdings, patents, trademarks, and brands or brand names.
In the insurance world, admitted assets work a little differently. When we talk about admitted assets in insurance, we’re analyzing a company’s ability to cover its liabilities.
How many assets does an insurance company have to cover its debts? If thousands of policyholders suddenly made an insurance claim today, then how much cash could the company get from those assets to cover its debts?
In insurance, admitted assets must be liquid and hold measurable value.
Insurance companies typically classify their assets into one of three categories, including:
- Admitted Assets
- Invested Assets
- Non-Admitted or Other Assets
Based on state laws, an insurance company’s admitted assets must be carefully accounted for and presented in financial statements. States have different laws governing which assets can be considered admitted assets and non-admitted or non-admissible assets.
Why is insurance different? Insurance companies use statutory accounting (STAT) rules set by the National Association of Insurance Commissioners (NAIC) to report financial data. Most non-insurance companies use GAAP accounting principles.
Admitted Assets Indicate the Financial Stability of Insurance Companies
The admitted assets of an insurance company indicate the company’s ability to fund and pay for claims during the course of any year. Because of this requirement, the admitted assets must be liquid and capable of being valued.
If the insurance company faces a rush of high-value claims at once, the company might need to liquidate assets to cover its liabilities and pay out on those claims.
Certain assets are illiquid and generate no income for the insurance company. These assets are listed as “All Other Assets” and are not considered admitted assets. Furniture, buildings, and liabilities through unpaid or deferred premiums do not count. “Invested assets”, which include any money locked into investment vehicles, also do not count as admitted assets.
Some states consider unpaid and deferred premiums to be non-admissible assets for accounting purposes, in which case they’re not included under the “all other assets” category at all.
What Do Insurance Companies Consider Admitted Assets?
Admitted assets for US insurance companies include things like:
- Accounts receivable
Any items that can be quickly converted into cash (i.e. liquid) when there’s a rush of claims are considered admitted assets.
When an insurer’s liabilities exceed its admitted assets, the insurer is considered to be insolvent. The insurer does not have enough assets to cover the amount it owes to policyholders. Each state has different rules governing how claims are dealt with when an insurance company becomes insolvent.
An insurance company’s admitted assets and liabilities lie in a careful balance. However, the admitted assets are never enough to cover the maximum potential claim on any given insurance company. Let’s say every single policyholder in an insurance company suddenly decided to make a claim at once. No insurance company will be able to cover this sudden liability even when liquidating all of their admitted assets.
Instead, the goal of admitted assets is to cover the likely worst-case scenario for an insurance company. If a hurricane sweeps through a populous area of the United States, for example, and causes thousands of high-value claims, then the insurance company should have enough admitted assets to cover this situation.