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. For the purposes of this blog post, 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 dive into the differences between admitted and non-admitted lines, and when each type is 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 regulations result in business models that focus on serving different areas of the insurance market. As a result, admitted carriers offer certain insurance policies that non-admitted carriers do not and vice versa.
The designation of a carrier as ‘admitted’ by a state’s insurance commissioner may appear to give the insurance company some seal of authority or preferential treatment. 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 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:
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:
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.
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.