Defining Non Admitted Assets in Insurance Accounting

In the world of insurance, not all assets are treated equally. For regulatory accounting, some are designated as “non-admitted assets”—items an insurer possesses but is not permitted to count towards its financial strength for solvency purposes. This distinction provides a conservative measure of a company’s ability to meet its obligations to policyholders. Understanding this classification is necessary to accurately interpret an insurer’s reported financial health.

The Purpose of Asset Classification in Insurance

The core reason for classifying assets in the insurance industry is the protection of the policyholder. Regulators require a conservative valuation of an insurer’s financial position to ensure it has sufficient, readily available resources to pay claims at any time. This regulatory oversight is governed by a framework known as Statutory Accounting Principles (SAP), which prioritizes solvency and liquidity. SAP is intentionally more restrictive than the Generally Accepted Accounting Principles (GAAP) used by most other industries, which tend to focus on a company’s long-term earning potential for investors.

Under SAP, assets are separated into two primary groups: admitted and non-admitted. Admitted assets are those that are easily valued and can be converted to cash without significant loss to meet policyholder obligations. These include cash, high-quality government and corporate bonds, and certain real estate holdings.

Conversely, non-admitted assets are those that are not liquid or whose value is too uncertain to be relied upon for paying claims. By excluding these assets from solvency calculations, SAP creates a more rigorous and prudent measure of an insurer’s true ability to fulfill its promises to customers.

Common Categories of Non-Admitted Assets

Several types of assets are consistently categorized as non-admitted due to their lack of liquidity or uncertain collectibility.

• Fixed assets, which includes company-owned property like office furniture, fixtures, and computer equipment that cannot be quickly sold at a predictable price.
• Unsecured receivables, such as any loans or advances made by the insurer that are not backed by specific collateral, like loans to employees.
• Premiums receivable that are more than 90 days past due, as the likelihood of collection drops significantly after this period.
• Prepaid expenses, such as rent or insurance premiums paid in advance, because they are not a source of cash for paying claims.
• Certain types of investments, including investments in a parent or subsidiary company, which can be difficult to liquidate.

The Impact on an Insurer’s Surplus

The classification of an asset as non-admitted has a direct mathematical impact on an insurer’s financial statements. These assets are subtracted when calculating the policyholder surplus, a primary indicator of an insurer’s financial health. The policyholder surplus represents the amount by which an insurer’s admitted assets exceed its liabilities, serving as a capital cushion to absorb unexpected losses and protect policyholders.

The calculation is straightforward: Total Assets minus Non-Admitted Assets minus Liabilities equals Policyholder Surplus. Every dollar assigned to a non-admitted asset directly reduces the policyholder surplus by one dollar.

For instance, consider an insurer with $100 million in total assets, $70 million in liabilities, and $5 million in non-admitted assets, consisting of office equipment and overdue premiums. Without the non-admitted asset adjustment, its surplus would appear to be $30 million ($100M – $70M). However, under Statutory Accounting Principles, the $5 million in non-admitted assets must be subtracted, resulting in a regulatory surplus of $25 million.

Statutory Reporting Requirements

Insurance companies are required to provide a transparent accounting of their non-admitted assets through a formal, standardized reporting process. This disclosure is a central component of the NAIC (National Association of Insurance Commissioners) Annual Statement, a comprehensive financial report that every insurer must file with state regulators.

Within the Annual Statement, specific schedules and exhibits are dedicated to the itemization and reconciliation of non-admitted assets. For example, the balance sheet will clearly show a line item where the value of non-admitted assets is subtracted from total assets to arrive at total admitted assets. Other exhibits provide detailed breakdowns, listing the specific assets, such as overdue agent balances or company-owned furniture and equipment, that have been classified as non-admitted.

The purpose of this rigorous reporting is to give state insurance departments a clear and consistent basis for analyzing an insurer’s solvency. Regulators can scrutinize the nature and amount of non-admitted assets to ensure they are classified correctly according to SAP.