Admitted Assets Details

An organization called the National Association of Insurance Commissioners (NAIC) serves as a regulatory entity that monitors the competitive markets of insurance companies and protects the public interest against potential frauds. One way NAIC achieves this goal is by requiring insurance companies to clearly differentiate between assets with assessable and easily convertible value and assets without those qualities. These valuable liquid assets are known as admitted assets.

Most non-insurance companies are allowed to include any asset they have in their financial statements. Insurance companies, however, need to follow the rules set by NAIC so they can continue to be legal entities under U.S. law. Including admitted assets in the financial statements is important so analysts and regulators can more easily measure an insurance company’s degree of solvency. Solvency refers to a company's capacity to take care of its financial responsibilities, especially long-term debts.

As admitted assets are easily cash-convertible, the amount of them represents a company's ability to meet the capital requirement needed to pay insurer or policyholder’s claims. If an insurance company has a relatively low amount of admitted assets compared to the number of claims, it can result in the policyholders' inability to get compensation. Or worse, an insurance company’s inability to provide coverage due to a lack of capital may result in it entering the state of insolvency.

Example of Admitted Assets

Some examples of admitted assets include cash & cash equivalent, accounts receivable, income from real estate mortgages, and investments. Insurance companies can easily turn these assets into money in case the need arises. This often is quite simple as these assets are already in the form of cash, or immediate buyers will become willing to buy these assets on the spot.

Another thing to note is that these assets have a clear-cut value. You can easily appraise the worth of each of the items by consulting their respective market values. As mentioned before, admitted assets need to be liquid and have a demonstrable worth.

Admitted Assets vs. Non-Admitted Assets

Since there are admitted assets, there are also non-admitted assets. Non-admitted assets are assets with financial values that are either difficult or impossible to measure. These assets are also non-liquid, meaning it would take more than one year for firms to convert them into cash. NAIC prohibits insurance companies from incorporating non-admitted assets into their financial statements. The reason for this is non-admitted assets don’t represent an insurance company’s ability to pay out oncoming claims.

A few examples of non-admitted assets are furniture, fixtures, and most intangible assets. Intangible assets like brand recognitions and copyrights can't be distinctly measured with a dollar amount and are almost impossible to sell. One of the only ways to purchase these intangible assets is if you buy the whole company.

Even though non-admitted assets are practically ineffective for short-term use, that does not mean they are totally worthless to insurance companies. Insurance companies may use non-admitted assets as collateral. Collateral is an asset or property given as security for a loan that will be forfeited if the borrower defaults. Furthermore, analysts may take non-admitted assets as an indicator to determine a company’s leverage (the degree to which it is dependent on debt rather than equity to finance operation).