Admitted vs. non-admitted insurance: What’s the difference?

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 considering options, one of the more commonly asked questions is, “What’s the difference between admitted and non-admitted insurance?” If you’re feeling completely lost when it comes to these two insurance options, don’t worry. We’re here to help.

In this post, we will take an in-depth look at the differences between admitted and non-admitted insurance.

What is admitted insurance?

An admitted insurance provider is licensed by the state (or states) in which they operate. To continue to provide admitted insurance policies, insurance companies must follow their state department regulations. Companies providing admitted insurance policies must meet specific requirements, such as proof of financial security, and must make contributions to the state’s insurance fund.

One of the main distinctions between admitted and non-admitted insurance is that if a provider of an admitted policy is unable to pay a claim, they can seek assistance from the state’s insurance guaranty fund. Insurance companies providing non-admitted insurance do not have this access.

A common misconception about this issue is that many believe that the insurance companies 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 provider.

So, an insurance provider could sell admitted and non-admitted products, even having an admitted and non-admitted version for the same type of coverage.

How does an insurance product become admitted?

For a product to become admitted, it must be filed with the state’s insurance commissioner. Every state has insurance requirements prescribed by its Department of Insurance (DOI) that a product must comply with to complete this process. This is a fairly complex process that differs from state to state. To get an admitted insurance product approved, insurance providers must ensure that all of the rates and forms are in compliance with state recommendations and regulations. For this reason, getting an admitted insurance product approved is usually a relatively slow and drawn-out process.

Once the request has been approved and the product has obtained the status of “admitted,” the insurance provider must pay the state’s insurance guaranty association a percentage of the annual income earned from selling this product. 

Admitted insurance products are thus backed by the state’s guaranty fund. This means that if the insurance company becomes insolvent, the state will pay (up to a state-specified limit) the company’s claims on admitted products.

What is non-admitted insurance?

Non-admitted insurance is a policy that is not licensed by the state but is still allowed to operate under special circumstances. Unlike admitted insurance, these policies are not bound by state regulations regarding rates or policy forms, and the companies that provide them do not contribute to the state’s insurance guaranty fund. State insurance departments allow providers of non-admitted insurance to operate for a number of reasons, but the primary reason is that the company offers a necessary service that admitted policies do not provide.

For example, a non-admitted policy may cover higher-risk or unique situations.

Here are a few examples of common non-admitted insurance coverage:

• High-risk property insurance (coastal areas or regions prone to natural disasters)
• Specialty policies such as D&O coverage or cyber liability insurance
• Business insurance for emerging or high-risk industries (cannabis, online gambling, adult entertainment, crypto, debt collection, etc.)
• International business policies

Important note: Just because non-admitted insurance providers are not required to follow state regulations doesn’t mean they do not. In fact, many non-admitted insurance providers still follow procedures and requirements similar to those of admitted providers.

What regulations must providers of non-admitted policies follow?

Non-admitted insurance is often referred to as “excess and surplus line.” While these products are not regulated by the state insurance commissioner, they are regulated by the state surplus lines office.

This excess and surplus market was created to cover risks that standard markets did not want to, allowing insurance companies to offer products on a non-admitted basis.

This is all to say that non-admitted products are not the lawless “Wild West” of the insurance world. While companies offering non-admitted insurance do not have to go through the long approval process that those providing admitted go through, they 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 also taxed by the state, and all agents working with non-admitted companies need to be licensed surplus lines brokers.

Still, the regulations of these companies are significantly less invasive than those that companies only dealing with admitted products must adhere to.

Are providers of non-admitted insurance legit?

The prefix “non” is often interpreted as a warning sign by some companies, but the truth is that non-admitted insurance is absolutely legitimate and is often provided by financially stable companies. Non-admitted insurance providers need to have secure reinsurance options or a massive monetary reserve 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. Just because a non-admitted insurance provider does not have access to the state insurance guaranty fund does not mean it is an illegitimate provider.

As mentioned before, non-admitted insurance companies still need to be licensed. Even though they are not as regulated by the state as companies offering admitted products, there is still a significant amount of regulation involved in selling non-admitted insurance.

What are the benefits of admitted insurance?

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 insolvency. This means that if the company becomes insolvent, the state will pay (up to a state-specified limit) the provider’s claims on admitted products.

Here are a few of the main benefits of admitted insurance:

• Improved financial protection: Admitted policies are backed by the state’s guaranty fund, which provides some protection to policyholders in the case of the provider’s insolvency.
• State-regulated rates and policy terms: Consumers are protected further as insurance rates and terms are regulated by the state insurance department.
• Dispute resolution support: In the case of a dispute with an admitted insurance provider, policyholders can reach out for help from the state insurance department.
• Legally required to meet strict financial security standards: Admitted providers must meet specific financial standards set by law.

What are the downsides of admitted insurance?

While admitted insurance can offer certain regulatory protections to buyers, they are not a one-size-fits-all solution. In short, admitted does not equal better.

Here are a few downsides of admitted insurance:

• Limited coverage for high-risk and emerging industries or specialized policies
• Limited flexibility when it comes to making changes to policy or addressing emerging types of risks
• Generally, approval processes are slower due to state department oversight
• Can be more expensive for certain types of coverage due to regulatory compliance

When an insurance policy is admitted, it means that they are licensed by the insurance commissioner of the state in which they operate. This means that the commissioner has approved the rates and forms for the insurance product that is being sold to the public.

And while this definition can make admitted products appear 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 company offering it.

In the end, a high-quality and stable non-admitted insurance product is better than a low-quality admitted policy.

What are the benefits of non-admitted insurance?

Non-admitted insurance is not necessarily a worse option than admitted insurance. In fact, in certain situations, non-admitted policies may actually provide better coverage. For example, if your company needs to protect itself from high-risk events such as floods and earthquakes, an admitted insurance provider might not be able to afford to cover such instances, while non-admitted policies would provide coverage.

Let’s take a look at some of the main perks of non-admitted policies.

• Cover more specific situations or higher risks: Non-admitted providers can write policies that cover unique and more specific risks that admitted insurers won’t touch.
• More flexible pricing: Since non-admitted policies don’t have to adhere to the state’s set rates, the pricing of their policies is generally more flexible. This means that non-admitted insurance can fill the gaps in risk that admitted policies can’t or won’t insure.
• Faster processes: Since regulations are relaxed for non-admitted companies, getting covered and changing your coverage often takes less time and won’t generally include the filing costs that an admitted insurer would have to charge.

What are the drawbacks of a non-admitted insurance policy?

The main drawback of purchasing a non-admitted policy is that you will not have the protection of the state’s guaranty fund. For example, if an admitted insurance company is unable to pay back a claim, the state’s guaranty fund will cover the costs, which is not the case for non-admitted companies, making them a riskier option.

Here are some of the main drawbacks of non-admitted insurance products:

• Less protection for policyholders: Since providers of non-admitted insurance do not have to operate under their state’s insurance laws, they don’t have the state in their corner in the event of insolvency.
• Fewer policy options: There are limitations to which policies can be non-admitted. Generally, insurance companies can’t write non-admitted insurance policies that are available on the admitted market. In fact, in most cases, the only way providers can offer non-admitted insurance on the admitted market is if three different providers have previously rejected the admitted policy.
• Potentially higher costs: While non-admitted policies can occasionally have lower premiums, they may also be more expensive due to the increased risk and lack of regulation.

Insolvency and liquidation for admitted vs. non-admitted providers

Insolvency refers to a financial situation in which a company cannot meet its financial debts or obligations as they come due. When a company is declared insolvent, they often liquidate their assets in order to distribute the cash to creditors.

While policyholders never want to see their insurance policies insolvent, it is a major issue that does occur in the real world. So, it is crucial to understand what might happen if an insurance provider becomes insolvent.

In this section, we will break down how insolvency and liquidation differ between admitted and non-admitted insurance.

Admitted insurers

One of the main differences between admitted and non-admitted insurers is the process that unfolds if a company becomes insolvent and must be liquidated.

When a company providing admitted insurance faces liquidation, the state’s guaranty fund takes over the processing and payment of current and future claims. However, it’s worth noting that the guaranty fund is not obligated to pay claims in full, as regulations limit the amount it can pay according to the fund’s cap. If the company has an exceptionally high revenue threshold, it might not qualify for any state coverage at all.

Additionally, the coverage guaranty fund can offer may be further restricted if the state is dealing with multiple large liquidations simultaneously. In these cases, policyholders often find themselves at a disadvantage, as the guaranty fund may be unable to cover their true loss amount — sometimes not even close to it. 

Payments from the guaranty fund can take a long time to process, leaving policyholders with very little support in obtaining their payments and potentially receiving much less coverage than they originally paid for.

Non-admitted insurers

When a company with a non-admitted insurance policy faces liquidation, the process is similar to standard bankruptcy proceedings. The liquidator collects the company’s assets, identifies all outstanding creditors, and creates a plan to disburse the necessary amounts using the company’s assets. This plan is then submitted to the court for approval.

Unfortunately, when non-admitted insurers liquidate, the outcome for policyholders is often just as disappointing. They may have to incur legal costs themselves to receive settlement payments, and in the end, these payments are often far from what they expected when they initially purchased the coverage.

Admitted vs. non-admitted insurance: Which is better?

When it comes to choosing admitted and non-admitted insurance, there is no better or worse option. As with most decisions you make when running a business, you’ll need to look at the pros and cons of each option and decide which is a better fit for your business’ 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 providers that sell both admitted and non-admitted products.

Generally speaking, there are two primary things to do when making this decision:

• Identify your business’ risks and choose the insurance company 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 provider.
• Take a look at the provider’s ratings on AM Best. All insurance companies, whether admitted or non-admitted, receive ratings for their financial stability, performance, and quality of service. AM Best is the world’s largest credit rating company specializing in insurance. Here you can research different insurance companies based on their grade from AM Best — ratings range from from A++ to F based on the provider’s ability to repay creditors, its financial performance compared to peers, and other criteria.

How Embroker can help 

At Embroker, we work with both admitted and non-admitted policies to ensure your business has the most comprehensive selection of insurance products to choose from. We understand how tiring it can be to search for the right insurance products and carriers for your business, which is why we are here to help. 

Create your Embroker account today to get a free quote.