Insurance 101: Admitted Insurance vs. Non-Admitted Insurance

If you’ve gotten far enough down the rabbit hole of the insurance industry’s inner mechanisms, you may have come across the idea of admitted insurance vs. non-admitted insurance. 

Admitted insurance is generally understood to be what people are familiar with when it comes to insurance and its regulation – insurance carriers regulated by state governments distributing downstream through agencies, MGAs, and agents or brokers. Non-admitted insurance gets a little more niche, so if your insurance experience is in personal policies like car insurance, life insurance, or similar, there’s a good chance you’re not too familiar with this.

While we’re veering off the beaten path a little with this topic, please keep in mind that you’re responsible for doing your own research. We are in no way recommending any course of action or set of insurance products, so please be sure you’re consulting with licensed professionals to make any decisions for yourself and your business.

What is the difference between admitted and non-admitted insurance?

It’s a common question, and seems simple enough: Admitted insurance is a product regulated by the state (admitted for business), non-admitted insurance is not. 

Despite some common misconceptions, though, this isn’t to say non-admitted insurance is just unregulated altogether. Non-admitted is a state-specific designation: A non-admitted policy in Michigan might be admitted in Wyoming. Carriers, too, can operate on an admitted or non-admitted basis. You can even have an admitted carrier selling non-admitted policies, if a carrier provides access to policies that would typically only be admitted in a different state or region. 

Most states generally require non-admitted carriers to submit things like their articles of incorporation and principal information, as well as solvency verification information. And non-admitted insurance can legally only be sold by agents with a specific license, known as a surplus lines broker or excess lines broker in most states. So, you can’t set yourself up as a non-admitted insurer, pass out fake policies, collect money, and then bounce – consumer complaints and other actions against non-admitted insurance and insurers can still catch up through the carrier’s resident state or targeted action from state commissioners.

Because non-admitted carriers and products are exempt from many regulations, many of the key differences between admitted and non-admitted insurances are in consumer protections and pricing. For one thing, if you purchase a non-admitted insurance policy, you won’t get the tax break that often comes with them – depending on the state, parties will pay taxes and additional fees for non-admitted contracts. For another, with states unable to set rates for non-admitted insurance, costs are typically higher than comparable admitted insurance. 

States not regulating specific policies also have solvency repercussions for those who purchase non-admitted insurance. Should an insurance carrier fail, non-admitted contracts aren’t covered by the state’s guaranty fund. So, non-admitted insurance is a “buyer beware” proposition to an even more serious degree than traditional contracts.

Why is there such a thing as non-admitted insurance?

For those of us who are pretty compliance-happy over here, non-admitted insurance seems to stand in direct opposition to the numerous levels of regulation the states and federal government layer over the distribution pipeline. So why is non-admitted insurance a thing?

Consider the hypothetical of medical malpractice liability insurance in a particularly litigious state (we’re not naming names). If the state sets a rate and tells carriers they can’t raise rates on policies, the obvious answer for carriers to maintain profits becomes reducing the actual benefits of the coverage. So, it may be affordable coverage, but it’s not providing much in the way of protection.

In this situation, a hospital or doctor’s association might explore coverage from non-admitted policies that aren’t subject to the low rate-setting standards of that state. They may decide it’s worth paying more – even a lot more – to have robust coverage in the likely case of a malpractice lawsuit.

Some advocates of non-admitted insurance argue the freedom from states’ rate-control makes non-admitted insurance “safer” because insurers can more closely match rate to the actual risk they’re underwriting. On the other hand, in the case of insolvency or if the carrier underwrites too much risk, there are almost zero options for recourse – you can’t complain to the state, or avail yourself of any guaranty funds.

Why might a policy be admitted in one state but not another?

Often, non-admitted insurance policies are quite niche and are attractive because they have rare coverage. For instance, paranormal insurance has a pretty limited use-case scenario and may not be worth a carrier getting full admission in each state. 

As another (more realistic) instance, consider a vending machine insurer. It’s pretty specific insurance, sought after by a handful of companies or vending-machine operators in any given state. The carrier that offers vending machine insurance would be admitted in their resident state, but paying to be admitted across all 50 states and submitting each rate change through all the different state departments of insurance would likely not be cost-effective. So, vending machine operators may only have non-admitted insurance options.

Best practices for considering non-admitted insurance coverage

In the relative degrees of safety that we’re talking about here, for those looking at non-admitted insurance for coverage, there are a few best practices to consider:

• Often, insurers and policies that may be unregulated and non-admitted in your state are admitted and regulated in other states – check their track record in those states to get an idea of how they operate. 
• The policy (and maybe even the carrier) might be non-admitted and unregulated, but your agent is not. Check out the surplus lines agent or broker you’re using and be sure they are a credible professional with a history of doing their due diligence. Don’t be afraid to ask for references from other clients they’ve sold the same non-admitted policies to in the past, particularly ones who’ve incurred claims. 
• We cannot emphasize enough the importance of credit ratings when it comes to the solvency of non-admitted insurers. Since there is no state backup on non-admitted coverage, you want to be crystal clear about an insurer’s financial position before you sign any contracts!

With these best practices in mind, you may have good reason to purchase (as a consumer), or sell (as an agent) un-admitted insurance policies. It’s all about doing your research and being comfortable with the level of risk, pros and cons, and the carrier you’re either purchasing from or representing. 

Regardless of what states your company might be admitted to sell in, see how AgentSync helps you – and all your agents – stay compliant.