What's the Difference between Admitted and Nonadmitted Insurance Companies?
When you search for insurance products, you may come across the terms "admitted" and "nonadmitted" when describing carriers. There are a few differences between the two, but one of the main differences is in the state regulations that they must comply with.
In short, an admitted carrier has met the state's requirements for licensing, which includes filing their rates and having them approved. In addition, because these carriers are admitted, their policies are backed by the state's insurance guaranty fund. This means that if an admitted company goes bankrupt or become insolvent, the state will take over its financials and will likely sell its assets to cover outstanding liabilities. If the assets are not enough, the guaranty fund will make up the difference; this also includes pending claims and outstanding premiums.
Nonadmitted carriers, also referred to as surplus lines carriers, are not necessarily licensed with each state where they sell their products, but they are licensed by their home state or country to sell these products. Even though these companies are not specifically licensed by the state, a state may require them to register with the department of insurance.
Nonadmitted companies or surplus lines insurers are not backed by state guaranty funds and don't have to follow the same rules as admitted insurers, such as filing rates and having them approved. This also means that if these insurers become insolvent, policyholders will not receive assistance from state guaranty associations.
Because these insurers' rates don't have to be approved, their pricing flexibility allows them to offer products and insure risks that admitted companies might not offer coverage for, which makes them necessary for some policyholders. However, due to the increased risk in the nature of their products, policies are likely to cost more.
Why Use Nonadmitted Carriers?
It may sound like an unwise decision to do business with a company that's not approved or licensed by the state insurance department, but in many cases these products may be needed and could be a good investment.
Admitted companies typically specialize in and target standard risks and operate in what is known as the "standard market." The standard market is made up of "everyday" products such as automobile liability coverage, basic homeowners insurance, and life and health insurance.
Applicants whose insuring needs pose higher risks may not meet a standard-market company's underwriting guidelines and won't be able to secure coverage. At this point, an individual may need to seek coverage from a surplus lines insurer. For the most part, the surplus lines market applies to businesses and their associated risks.
Examples of products that may not be available through the standard market include but are not limited to:
- General commercial liability
- Property and liability for oil and gas refineries
- Mobile home policies
- Residential property coverages, such as earthquake and flood
- Care and transportation of hazardous materials
- Private collections
- Medical malpractice
- Automobile physical damage coverage
Insuring private collections on the nonstandard market could include insuring items such as an expensive art collection.
Rather than going without insuring these risks, it's typically in the best interest of either a business or an individual to obtain coverage when considering the potential cost of a loss that surplus lines insure against.
Important Information about Nonadmitted Companies
Even though it is often advised to seek coverage from licensed and admitted insurers, that option may not always be available. Nonadmitted companies may not be officially authorized or licensed by the state that they're selling policies in, but this doesn't necessarily mean that you should avoid them altogether.
These carriers exist because there are a number of risks that businesses and consumers need to insure, and coverages can't be found on the standard market. Also, even though not backed by state guaranty funds, these insurers are often financially stable.
States may not license these insurers and may not regulate their rates, but states do set some regulations for these companies.
Most states, like Texas and Wisconsin, require that products from nonadmitted carriers are obtained through a specially licensed agent known as a surplus lines agent.
States often only allow policyholders to be placed with these companies if they cannot find coverage from an admitted carrier. For example, the Texas Department of Insurance only allows agents to place a risk with a surplus lines company after the agent has "diligently" tried and failed to place the risk with admitted companies.
States also regulate which companies are eligible to do business in the state and set financial requirements. In Texas, in order be eligible, a company must have at least $15 million in combined capital and surplus, and in California, the minimum is $45 million. Capital and surplus are a company's financial cushion in the event of unexpected claims.
States may also impose surplus lines taxes, which is a percentage of the premium that is to be paid to the state. In Michigan, the tax amount is 2.5 percent of the premium amount.
With the implementation of the Nonadmitted and Reinsurance Reform Act of 2010 (NRRA), which took effect in July 2011, only the insured's home state may tax surplus lines transactions. It is the surplus lines producer's responsibility to collect, report and pay these taxes.
Protecting Yourself when Shopping the Surplus Lines Market
One of the biggest things about getting a policy through a nonadmitted company is the fact the it's not backed by the state's guaranty fund. States may monitor the financial condition of eligible surplus lines companies to protect residents, but you can check on their financial stability as well. By contacting a service like A.M. Best, you should be able to see how financially sound a company is before making a purchase, free of charge.
You can also check and make sure that your agent is placing you with a carrier made eligible by your state. Your state's insurance department should offer a list of approved carriers like the List of Approved Surplus Lines Insurance (LASLI) provided by California.
In addition, your surplus lines agent should also be licensed with the state, and you should be able to check his or her licensing status with your state's insurance department as well.