In this post, we discuss and explain the terms admitted, non-admitted, surplus lines, and excess lines as they relate to business insurance.
If you’re at all familiar with the process of shopping for insurance for your business, it’s likely you’ve seen the terms “non-admitted” and “admitted” relative to how insurance carriers are classified. These terms can be baffling to the layman. For the purposes of this article, the terms admitted and non-admitted refer to how a particular insurance company is regulated by individual state insurance departments. Let’s take a deeper look into the differences, and why they are necessary.
The difference between admitted and non-admitted (also known as “surplus lines” and “excess lines”) insurance carriers lies mainly in the state-specific regulations they have to adhere to. These varying, and often confusing, regulations result in business models that focus on serving different areas of the insurance market. As a consequence, you may not be able to purchase a specific kind of business insurance for your company from a non-admitted carrier that an admitted carrier provides, and vice versa.
At first blush, the admitted designation of an insurance carrier by a state’s insurance commissioner may appear to give the insurance company some seal of authority or preferential treatment based on superiority. However, the name is primarily an administrative one rather than a mark of stability or quality. As we’ll see, other aspects are more important when choosing an insurance carrier.
Here’s a summary of what these terms mean in the insurance business and how they may affect you as a business owner.
Admitted Insurance Carriers
Admitted insurance coverage is that which has been purchased from an insurance carrier formally licensed (or “admitted”) to operate by the state insurance department where that company transacts insurance business. These admitted carriers are subject to state insurance regulations governing things like capitalization, organization, rate approval, claims handling and policy forms, among other things. Non-admitted insurance carriers, on the other hand, are not subject to these same rules.
Admitted insurance carriers must adhere to strict requirements for transacting business. Following are some general examples of these requirements:
- Admitted insurance companies are required to have every rate and each insurance product approved by the state insurance department before they can be sold.
- Because admitted carriers are required to file their rates with the state, these companies don’t have the pricing flexibility that non-admitted carriers have.
- Claims decisions by admitted carriers can be appealed to the department of insurance if an insured feels a claim was not handled properly.
- Insureds have the protection of a state guaranty fund, in the event that an admitted carrier becomes insolvent or otherwise is unable to pay claims. Think of a guaranty fund as insurance for insurance companies. State guaranty funds are funded by insurance carriers admitted in that particular state.
- Additionally, purchasing insurance from an admitted carrier usually means that customers can avoid paying certain surplus lines insurance fees and taxes as part of the policy.
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Non-Admitted Insurance Carriers
The “non-admitted” or “surplus lines” and “excess lines” insurance company is regulated much differently than their admitted counterparts. The laws regulating non-admitted carriers are far less stringent than those of admitted companies and are usually overseen by non-profit surplus lines associations within each state. The significant features of the non-admitted carrier can include the following:
- Upon approval by the state surplus lines association or office, non-admitted insurance carriers are not required to have rates or insurance products approved.
- As noted earlier, non-admitted insurance companies have far greater pricing and product flexibility. This allows surplus lines insurance companies to provide coverage for specific and unique and risks that admitted carriers might not want to insure, such as asbestos remediation for example.
- Because they do not have the backing of state guaranty funds, non-admitted insurance carriers are required to have larger capital reserves in order to do business.
- Non-admitted insurance companies are also subject to more numerous fees and taxes, which can make the surplus option a more expensive one in some circumstances.
As a business owner, you may be asking yourself the obvious question at this point: Why even bother with non-admitted carriers at all, if that option appears to have more risk? In practice, the answer is that for many risks, the non-admitted carriers are the only insurance option. The fact is, states permit non-admitted insurance companies to transact business because there are insurable risks that will not or cannot be met by admitted companies.
As an example, take business insurance for contractors operating in New York City: Many admitted insurance carriers steer clear of this market because of the underwriting risks inherent to these classes of business in this area. For some contractors, doing business in New York requires the use of non-admitted carriers, or some combination of admitted and non-admitted insurance, in order to adequately protect the business and satisfy owner insurance requirements.
Additional Points to Keep In Mind
Non-admitted companies are required to let the consumer know (by way of the wholesale broker, generally) that their insurance is with a non-admitted carrier. The broker must also demonstrate that it made a good faith effort to obtain the insurance from an admitted carrier prior to going the non-admitted route. Further, insurance companies, regardless of admitted or non-admitted status, are also rated for financial stability by independent rating agencies. The oldest and most well-known of these agencies is A.M. Best Company, which has provided business insurance rating services in the form of letter grades to the financial industry since 1899. A non-admitted insurance company with an “A” rating is generally a safer bet from a stability perspective than an admitted company with a “B” (or worse) rating.
As a business owner, you rely on your broker to do most of this work on your behalf. But it’s important to do your own research on the particular companies your broker is offering before you sign on the dotted line. Understanding the key differences between non-admitted and admitted insurance carriers is just one way to help you make better insurance decisions for your business. After all, you’ve worked hard to build your business to where it is today, and properly insuring that business can help protect the balance sheet from loss so you can continue to build into the future.