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The process of buying business insurance can certainly be a confusing one for business owners who don’t have much experience when it comes to shopping for policies that best fit the needs of their businesses.
When taking a look at carrier options during this process, one of the more commonly asked questions tends to be “what’s the difference between admitted and non-admitted insurance carriers?”
One of the common misconceptions related to this issue is that many believe that the carriers themselves are either admitted or non-admitted.
In reality, the classification of admitted and non-admitted refers to the insurance product itself that is being sold by a carrier.
The main difference between the two is related to the regulations that these carriers who sell admitted products must follow. When a product is admitted, that means that the product is licensed by the insurance commissioner of the state in which they operate. What this means is that the commissioner has approved the rates and forms of the insurance product that is being sold to the public.
And while this definition can make admitted products appear to be more legitimate, that’s not always the case. It’s important to remember that the designation is an administrative one and has no real bearing on the overall quality of the product or the stability of the carrier offering it.
With these facts in mind, it should be said that there are many other factors that are much more important when choosing a carrier than whether the carrier sells admitted or non-admitted insurance.
Let’s take a more in-depth look at the differences between admitted and non-admitted insurance.
What is an Admitted Insurance Product?
The first two questions that need to be asked in this conversation are the following:
How does an insurance product become admitted?
In order for a product to become admitted, it must be filed with the state’s insurance commissioner. Every state has insurance requirements prescribed by it’s Department of Insurance that a product must comply with in order to complete this process. It is a fairly complex process that requires the carrier to make sure that all of the rates and forms are in compliance with state recommendations and regulations, which is why the process of getting an admitted insurance product approved is usually a fairly slow and drawn out one.
Once the request has been approved and the product has obtained the status of an admitted one, a percentage of the annual income earned from selling this product will have to be paid to the state’s insurance guaranty association.
What are the benefits of an admitted insurance product?
While insurance companies might all have different reasons for wanting to sell admitted products, there is one major benefit. Namely, admitted insurance products are backed by the state’s guaranty fund in the event of a carrier’s insolvency. This means that if the company becomes insolvent, the state will pay (up to a state-specified limit) the carrier’s claims on admitted products.
What is a Non-Admitted Insurance Product?
People unfamiliar with the terms and the distinctions between the two tend to have more questions about non-admitted insurance products, which is perfectly understandable. Here are some of the question regarding non-admitted insurance that get asked most frequently:
What regulations must non-admitted carriers follow?
Non-admitted carriers are often referred to as “excess and surplus line carriers,” so while the products they sell are not regulated by the state insurance commissioner, they are regulated by what is called the state surplus lines office.
This excess and surplus market was created to cover risks that standard markets did not want to cover, giving non-approved carriers the ability to offer products on a non-admitted basis.
A non-admitted product does not have to go through the long approval process that admitted ones go through, but non-admitted carriers still need to submit company information such as articles of incorporation, a list of officers, and various financial information to the surplus lines office. They are taxed by the state as well and all agents working in non-admitted companies need to be licensed brokers.
Still, regulation of these companies is significantly less invasive compared to the regulations that carriers that only deal with admitted products must adhere to.
What are the drawbacks of being a non-admitted insurance company?
Since non-admitted insurance carriers do not have to operate under their state’s insurance laws, they don’t have the benefit of having the state in their corner in the event of insolvency. That also means that companies that purchase non-admitted policies do not have the protection of the state’s guaranty fund either, which might make non-admitted companies appear a bit riskier to deal with to some. Because of this, it’s not uncommon to see non-admitted insurance carriers having to pay higher taxes.
Another significant difference between the two lies in the types of insurance policies that each can offer. Non-admitted companies, generally, can’t write insurance policies that are available on the admitted market. Typically, the only way a non-admitted carrier can offer an insurance policy that’s present on the admitted market is if the policy has previously been rejected by three different admitted carriers.
What are the benefits of being a non-admitted carrier?
While non-admitted carrier can’t write policies that are on the admitted market, the good news is that they can write policies that cover unique and more specific risks that admitted insurers won’t touch.
Since they don’t have to adhere to the rates prescribed by the state, the pricing of their policies is a lot more flexible, which means that non-admitted companies can fill the gaps in risk that admitted carriers can’t or won’t insure.
For example, if your company needs to protect itself from high-risk events such as floods and earthquakes, admitted carriers might not be able to afford to cover such instances, while non-admitted carriers would.
Furthermore, since regulations are relaxed for non-admitted companies, getting covered, and changing your coverage if need be, often takes less time and doesn’t include the financial costs related to filing that an admitted insurer would have to charge.
Are non-admitted insurance companies legit?
The prefix “non” is often interpreted as a warning sign by some companies, but the truth is that non-admitted insurers are absolutely legitimate and financially stable companies. Non-admitted carriers need to have secure reinsurnace options or a massive monetary reserve in order to offer coverage for the high-risk events they often deal with, which they wouldn’t be able to do if they weren’t financially stable.
And as mentioned before, non-admitted agents all need to be licensed and even though they are not as regulated by the state as admitted carriers, there is still a significant amount of regulation involved in selling insurance as a non-admitted carrier as well.
Insolvency and Liquidation
As mentioned previously, one of the biggest differences between admitted and non-admitted insurers lies in the process that unfolds if the company is ever declared insolvent and must be liquidated.
When an admitted company is to be liquidated, the state’s guaranty fund will take over all processing and payment of current and future claims. However, the state fund is not obligated to pay claims in full because of existing regulations that will limit how much it can pay in claims according to the fund’s cap. And if the revenue threshold of the company is very high, the company might not qualify for any state coverage.
Furthermore, if the guaranty fund is dealing with a number of big liquidations at the same time, the coverage it would be able to offer would be further restricted. In these types of cases, the policyholders are the ones that truly lose out, because the guaranty fund simply won’t be able to cover their true loss amount, sometimes not even close to it. On top of that, payments made through the fund to policyholders in such cases can take a very long time to process.
So even though the state guaranty fund does provide some coverage for the carriers that face liquidation, policyholders can be left with very little help getting their payments and could stand to get a lot less coverage than they paid for originally.
When a non-admitted insurance carrier faces liquidation, the process is quite similar to what happens in most common bankruptcy proceedings. The liquidator will collect the company’s assets, determine all creditors outstanding, and then work on a plan that will enable them to pay out the amounts necessary using company assets. That plan is then submitted to the court for approval.
The outcome is often just as unfortunate for policyholders, who will have to pay legal costs themselves in an effort to receive settlement payments. Again, the payments often are, in the end, far from what they expected to get when initially buying the coverage.
Is One Better Than the Other?
As with most decisions you need to make when running a business, you need to look at what the pros and cons of each option and make the decision based on which option is a better fit for your business’s needs. There are situations when both admitted and non-admitted insurance companies may be beneficial for business owners.
It’s also important to note that there are insurance carriers that sell both admitted and non-admitted products.
One of the benefits of going with an admitted carrier and buying admitted products is that you’ll save money on various fees and taxes that you would have to pay if you were to decide to buy your insurance from a non-admitted carrier.
Generally speaking, there are two primary things to do when making this decision:
- Identify your business’s risks and choose the carrier that can provide the proper coverage. If your company faces risks that typical admitted insurance markets won’t cover, you might have no choice but to go with a non-admitted carrier.
- Take a look at carrier ratings. All insurance companies, whether admitted or non-admitted, receive letter grades as ratings. Rating organizations give grades from A++ to F based on the carriers ability to repay creditors, its financial performance compared to peers, and other criteria.
Choosing Between Admitted and Non-Admitted Carriers
Choosing a high-quality provider is what’s most important when making this decision, regardless of whether the carrier is admitted or non-admitted. What’s most important is making sure that the insurer can cover all of your risks appropriately, that the terms of the coverage are competitive, and that the company is financially sound and stable.
Most businesses tend to deal with admitted carriers when they need a standard insurance policy and turn to non-admitted carriers when the coverage they need is either difficult or impossible to obtain through an admitted carrier.
Non-admitted companies are able to provide more flexible premiums and will be more willing to work out coverage for high-risk situations. It’s important to note that there is no right answer and no option is unequivocally better than the other. Some of the largest insurance providers are non-admitted companies and can be just as financially secure, if not more so, than admitted companies.
If you need more help or information about admitted vs. non-admitted products and carriers, you can reach out to our team of expert brokers. If you prefer to get started on intelligent quotes, create your Embroker account today.
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