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The concept of admitted vs non-admitted insurance can seem slightly confusing. Admitted insurance is licensed by the relevant state department of insurance and subject to its oversight. Non-admitted insurance, also known as excess & surplus lines insurance, is, despite its name, perfectly legitimate but is sold through licensed intermediaries in states where the non-admitted insurer doesn’t have a license itself.

When considering exactly what is non-admitted insurance it’s important to note that this cover says nothing about the insurer’s financial stability or the quality of the product. However, it does impact regulatory oversight, the protection provided to the insured, and cost. Admitted vs non-admitted insurance is also an indicator of the respective carrier’s risk appetite and the flexibility likely to be offered. For all these reasons, it’s vital to understand the key characteristics of both.

Let’s dig a little deeper to answer the question, “What is an admitted insurer?”

Central to an admitted insurer definition is the fact that the carrier must file its product with the state insurance commissioner and is unable to write risk until it has its approval. This can be a long process and once up and running it must continue to abide by state regulations. Importantly, a percentage of its income goes to the state guaranty fund.

Regulations for admitted insurers are complex and vary by state. To receive their license, they must meet local requirements, among which the state must verify their policy forms and rates. Ongoing regulation encompasses areas such as solvency, product, market conduct and claims handling, all with the objective that insurers can fulfil their promise to pay legitimate claims and treat policyholders fairly.

Admitted insurance offers protection to buyers of insurance in two particularly important respects. With the state guaranty fund, the state should be able to pay claims or benefits (up to a state-specified limit) if the carrier becomes insolvent. Policyholders also have recourse to the state in the event of claims disputes.

Non-admitted insurance has grown rapidly as admitted carriers have pulled back on certain lines or types of risk, and now accounts for more than 20% of commercial premiums written. So, what is a non-admitted insurer? It is an insurer that writes risk in a given state without a license and can only offer coverage unavailable on the admitted market. Non-admitted insurers include US domiciled insurers writing risk in a different state, Lloyd’s syndicates and non-US insurers that have been admitted to the National Association of Insurance Commissioner’s (NAIC’s) Quarterly Listing of Alien Insurers.

Regulation isn’t non-existent. US-domiciled insurers will be regulated by their home state, whereas Lloyd’s syndicates and non-U.S. domiciled insurers are overseen by the NAIC International Insurers Department (IDD) and the Surplus Lines Working Group and are required to adhere to the IDD Plan of Operation. Those on the NAIC’s Quarterly Listing must establish trust fund as security. Additionally, the licensed broker that is the intermediary in the non-admitted insurance transaction has rules to abide by.

There are both risks and benefits to working with a non-admitted insurer. Insureds aren’t protected by the state guaranty fund. Nor can they access the state appeal mechanism. What’s more, additional fees are payable for non-admitted insurance. However, the cover may be more extensive, bespoke and flexible, fulfilling a need unmet by the admitted insurance market.

Hopefully, you can already see a clear distinction between the admitted carrier vs non-admitted. When determining which type of insurance fits best, various factors should be considered.

Admitted insurers can operate without certain fees and taxes. Miscellaneous fees for non-admitted insurance can, by contrast, be considerable. The surplus lines broker acting as intermediary typically collects and passes on surplus lines premium tax of typically 2% to 6% of the cost of cover, stamping fees of around 0.1% to 0.5%. Broker and other additional fees may also be payable. Depending on the state these may include a so-called diligent search fee to ensure the non-admitted cover isn’t available on the admitted market.

Policyholders of admitted insurers benefit from various protections. Product oversight, while varying by state, is an important safeguard against excessive rates and unfair policies. If the insurer fails, the state’s guaranty fund will step in to pay claims up to a certain limit. Additionally in claims disputes, policyholders can appeal to the state insurance department.

A major difference when considering admitted and non-admitted insurance is that if a non-admitted insurer collapses, its policyholders take their place in the line of creditors, with no guarantee claims will be paid.

Businesses with higher risk profiles may have to seek cover from a non-admitted insurer if their exposures are unique or unusual, if they operate in catastrophe-prone areas, or in emerging industries. It may also be the case if they require higher limits than those available from what is admitted insurance, or for any reason need policy flexibility that the admitted market won’t provide.

Since non-admitted insurance rates don’t need state approval, the carriers can charge what they need to take on these increased risks. The much-reduced regulatory oversight of the non-admitted insurer allows it to devise creative, bespoke solutions that would be unavailable in a standard policy.

Admitted insurance is the go-to cover for standard risk. The product is highly regulated and generally free from burdensome add-on fees and taxes. It’s easier to compare what two or more carriers are offering, and it benefits from local guaranty funds and appeals mechanisms.

However, since non-admitted insurers can’t offer cover available on the admitted market, they fill a vital role in insuring risk that their locally licensed peers won’t touch. Close attention to the financial strength ratings of non-admitted carriers will reduce the likelihood of insolvency leading to unpaid claims.

In concrete terms, non-admitted insurance addresses an important need in high-risk sectors such as construction and transportation, and emerging industries like legal cannabis farming. It is a key tool for managing evolving risks such as AI, or cyber, where insureds may want protection over and above what is available on the admitted market.

In property catastrophe it’s gained traction with changing and unpredictable weather patterns and the rising impact of secondary perils, such as wildfires and floods: non-admitted insurance is playing an increasingly important role in the homeowners’ market as well as commercial risk. However, if the potential insured operates in a long-established industry, without a worrisome loss history, in an area not prone to natural catastrophes and is looking for a standard policy, admitted insurance will probably meet its requirements.

Admitted vs non-admitted insurance – both fulfil different functions, and each comes with benefits and limitations.

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