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

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

What is an admitted insurance carrier?

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

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

A common misconception about 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.

So, in theory, an insurance provider could sell several admitted products as well as non-admitted products.

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. In general, to become an admitted carrier, insurance providers must make sure that all of the rates and forms are in compliance with state recommendations and regulations. For this reason, 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 “admitted,” a percentage of the annual income earned from selling this product will have to be paid to the state’s insurance guaranty association. You can think of this fund as insurance for insurance providers. It allows them to draw from state funds in the event that they do not have the funds available to cover large claims.

What is a non-admitted insurance carrier?

A non-admitted insurance carrier is an insurer that is not licensed by the state but is still allowed to operate under special circumstances. These carriers are not bound by state regulations regarding rates or policy forms and do not contribute to the state’s insurance guaranty fund. State insurance departments allow non-admitted carriers to operate for a number of reasons, but the primary reason is that the carrier offers a necessary service that admitted carriers do not provide.

For example, a non-admitted carrier may provide coverage for higher-risk or unique situations.

Here are a few examples of common policies that non-admitted carriers cover:

• 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 carriers are not required to follow state regulations, this doesn’t mean that they do not follow them. In fact, many non-admitted insurance providers still follow procedures and requirements similar to those of admitted carriers.

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 is all to say that non-admitted products are not the lawless “Wild West” of the insurance world. While non-admitted carriers do not have to go through the long approval process that admitted ones 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 in non-admitted companies need to be licensed brokers.

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

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 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 admitted carriers, there is still a significant amount of regulation involved in selling insurance as a non-admitted carrier.

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.

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

• Improved financial protection: Admitted policies are backed by the state’s guaranty fund, which protects policyholders in the case of 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.
• Higher financial stability requirements: Admitted carriers must adhere to specific financial requirements to ensure the institution is stable.
• Improved policy transparency: Due to state oversight and approval, policyholders will have a clearer understanding of their policy limits and requirements.

What are the downsides of admitted carriers?

While admitted carriers generally offer better protection to policyholders than non-admitted carriers, they are not a one-size-fits-all solution. In short, admitted does not equal better.

Here are a few downsides of admitted carriers:

• Limited coverage for high-risk and emerging industries or specialized policies
• 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 carrier offering it.

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

What are the benefits of a non-admitted carrier?

As we have now established, non-admitted carriers are not necessarily a worse option than admitted carriers. In fact, in certain situations, admitted carriers may actually provide better coverage. 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.

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

• Cover more specific situations or higher risks: Non-admitted carriers can write policies that cover unique and more specific risks that admitted insurers won’t touch.
• More flexible pricing: Since non-admitted carriers 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.
• Faster processes: 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.

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

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 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.
• Fewer policy options: Non-admitted companies, generally, can’t write insurance policies available on the admitted market. In fact, usually, the only way a non-admitted carrier can offer an insurance policy that’s present on the admitted market is if three different admitted carriers have previously rejected the policy.
• Potentially higher costs: While non-admitted policies can occasionally come at lower premiums, they may also come at a higher cost due to the increased risk and lack of regulation.

Insolvency and liquidation for admitted vs. non-admitted providers

Insolvency refers to a financial state where 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 insolvency is something that policyholders never want to see happen to their insurance policies, it is a major issue that does occur in the real world. So, as a policyholder, it is important to understand what happens if your insurance provider becomes insolvent.

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

Admitted insurers

One of the key differences between admitted and non-admitted insurers lies in the process that unfolds if a company is declared insolvent and must be liquidated.

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

Additionally, if the guaranty fund is dealing with multiple large liquidations simultaneously, the coverage it can offer may be further restricted. In these cases, policyholders often find themselves at a disadvantage, as the guaranty fund may not be able to cover their true loss amount — sometimes not even close to it. Moreover, payments from the 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 non-admitted insurance carrier faces liquidation, the process is similar to standard bankruptcy proceedings. The liquidator collects the company’s assets, identifies all outstanding creditors, and formulates a plan to disburse the necessary amounts using the company’s assets. This plan is then submitted to the court for approval.

Unfortunately, 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 carrier: Which is better?

Unfortunately, when it comes to admitted and non-admitted carriers, 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’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.

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 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 carriers based on their grade from AM Best, which ranges from from A++ to F based on the carriers’ 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 carriers 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.