Admitted vs. Non-Admitted Insurance: Key Considerations

MAY 9, 2024

Businesses and professionals typically carry some form of liability insurance designed to protect against risks. Evaluating the right insurance – and the right coverages – can be daunting. During that search, terms like “admitted” and “non-admitted” are often encountered. These terms refer to specific factors of a given insurance company’s regulatory and financial makeup.

This guide aims to educate readers on the crucial differences between admitted and non-admitted insurance companies, aiding them in making informed decisions regarding their insurance needs.

Comparing the Two Types of Insurance Providers

The terms "admitted" and "non-admitted" are often used in the context of insurance companies and their operational and licensing status in particular states or jurisdictions. Here's a breakdown of the differences:

Admitted Insurance Companies:

Regulated: Admitted insurance companies are licensed and regulated by the state's insurance department where they operate. This regulation includes compliance with state laws and participation in state guarantee funds.
Protection: Policyholders of admitted insurance companies are protected by state insurance guaranty funds. This means if the insurance company fails financially, the state will step in to pay claims up to a certain limit.
Rates and Policies: Rates and policy forms of admitted insurers must be filed with and approved by the state insurance department before they can be used. This provides a layer of consumer protection, ensuring rates are not excessive and policies are not unfairly biased.

Non-Admitted Insurance Companies (also known as Surplus Lines):

Less Regulation: Non-admitted insurance companies are not licensed by the state where they provide insurance, but they are allowed to operate under a surplus lines license. They are subject to less regulatory oversight compared to admitted insurers.
No Guaranty Fund Protection: Policyholders do not have the protection of state guaranty funds. If a non-admitted insurer fails, policyholders might not be able to recover their claims.
Flexibility: Non-admitted insurers can offer coverage that admitted carriers might not offer due to regulatory restrictions. They often cover high-risk businesses or individuals that cannot find insurance in the standard market.
Market of Last Resort: They are often considered insurers of last resort for risks that admitted insurers refuse to cover.

The primary difference between the two types of insurance providers lies in the level of regulation and protection offered to policyholders. Admitted insurance companies provide a level of financial security and regulatory oversight, including access to state guaranty funds. Non-admitted insurance companies can offer more flexibility and may insure risks that admitted insurers typically avoid, but they come with less regulatory protection for policyholders.

A Deeper Dive into Comparing the Two Insurance Company Types

When comparing admitted and non-admitted insurers, it's essential to delve into the nuances of regulation, protection for policyholders, flexibility in coverage, and the impact on premiums and policy availability.

Consider the following categories of regulation, protection, and flexibility with side-by-side comparisons between admitted and non-admitted insurance companies:

Regulation and Oversight

Admitted Insurers are subject to stringent state regulations that ensure financial stability, ethical practices, and consumer protection. These companies must comply with all state insurance laws, which include contributing to state guaranty funds, adhering to approved rates and policy forms, and undergoing regular financial audits.
Non-Admitted Insurers, while not regulated by state insurance departments in the same manner, are still subject to oversight in the jurisdictions where they are domiciled. They are often allowed more flexibility in setting rates and policy terms, which can be advantageous for covering unique or high-risk situations. These insurers operate under surplus lines regulations, which are less stringent but still provide a form of oversight to ensure solvency and ethical practices.

Protection for Policyholders

State Guaranty Funds: One of the most significant differences is that policyholders of admitted insurers have access to state guaranty funds, which can provide compensation up to a certain limit if the insurer becomes insolvent. Non-admitted insurer policyholders do not have this safety net, which introduces a higher risk in the event of insurer failure.
Regulatory Compliance and Consumer Protections: Admitted insurers offer a layer of consumer protection through compliance with state insurance laws, including those related to unfair practices and dispute resolutions. Non-admitted insurers, operating outside these frameworks, may not offer the same level of consumer protection.

Flexibility in Coverage and Policy Terms

Customization and Risk Appetite: Non-admitted insurers have a notable advantage in their ability to customize policies and cover risks that admitted insurers typically avoid. This flexibility can be crucial for businesses in high-risk industries or for individuals with unique insurance needs.
Innovation and Speed to Market: Without the need for state approval on rates and forms, non-admitted insurers can often introduce new products and coverages more quickly than admitted insurers. This agility can be beneficial in rapidly changing industries or emerging risk areas, particularly in professional categories like law, finance, or similar insureds.

Making Smart Decisions About Insurance Providers

Choosing between admitted and non-admitted insurance providers involves considering several key factors based on your insurance needs, the type of risk you need to insure, and your preferences regarding financial stability and regulatory protection. Here are some guidelines to help you make an informed decision:

Assess Your Insurance Needs

Type of Risk: Non-admitted insurers often cover risks that admitted insurers avoid, such as high-risk businesses, unique properties, or specialized industries. If your insurance needs fall into a niche category or involve high risks, a non-admitted provider might be your only option.
Availability of Coverage: Start by checking if the coverage you need is available through an admitted insurer. Admitted insurers can provide most standard insurance needs with additional protections.

Consider Regulatory Protections

Financial Stability and Guarantees: Admitted insurers are subject to stringent state regulations that include financial stability requirements and participation in state guaranty funds, offering a safety net if the insurer becomes insolvent. This level of protection is absent with non-admitted insurers, so weigh the importance of this safety net.
Policy and Rate Approval: Admitted insurers have their policy forms and rates approved by the state, which can offer additional peace of mind regarding the fairness of rates and coverage terms.

Evaluate the Insurance Provider's Reputation and Financial Strength

Financial Ratings: Check the financial ratings of the insurer through rating agencies like A.M. Best, S&P, or Moody’s. A strong financial rating can indicate stability and reliability, which is crucial, especially for non-admitted insurers without guaranty fund protection.
Reputation and Reviews: Research the insurer’s reputation, customer service, claims handling process, and reviews. Good customer service and efficient claims handling can be just as important as the coverage itself.

Understand the Terms and Costs

Coverage Terms: Review the coverage terms closely. Non-admitted insurers might offer more flexible terms and coverage for unique risks, but make sure you understand any exclusions, limits, and conditions.
Cost Comparison: Non-admitted insurers might have higher premiums due to the additional risk they take on. Compare the costs relative to the coverage provided and decide if it’s worth the additional expense for your specific situation.

Seek Professional Advice

Insurance Brokers and Agents: Consult with a knowledgeable insurance broker or agent experienced in your industry or with your specific type of risk. They can provide valuable advice on whether an admitted or non-admitted insurer is more suitable for your needs.
Legal and Financial Advisors: For complex insurance needs, especially in commercial contexts, consult with legal and financial advisors to understand the implications of choosing an admitted versus a non-admitted insurer.

After learning about the key differences between admitted and non-admitted insurers, it is critical to let your decision be guided by the type of risk you need to insure, the level of regulatory protection you’re comfortable with, the financial stability of the insurer, and the overall cost and terms of coverage. The goal is to find the best balance between protection, cost, and the specific needs of your risk profile.

Making an informed decision between admitted and non-admitted insurance providers can significantly impact your financial security and peace of mind, so take the time to research and consult professionals to ensure that your insurance coverage aligns with your needs and risk tolerance.