New to the industry? Need help explaining the difference to an insured or new employee?
Insurance companies can be designated as either admitted or non-admitted. The difference is insurance companies under one classification are required to follow state regulations while companies under the other are not. This impacts the type of risk the insurance companies can cover and how their business operates. With limitations, non-assurances and other factors to consider, the most important aspect for an applicant when buying insurance could be the insurance company’s financial position.
It is important to know that although admitted companies have the promise of the state insurance fund to pay claims, the amount that policy owners would receive is typically smaller amount than the limit they were paying for. Each state has a cap on how much is to be paid out if an admitted company fails. In Texas the Guaranty Fund is capped at $300k. This could be very difficult for the policy owner if it is considerably less than the amount needed or awarded. However, clients of non-admitted companies would be in a worse position as their claims would not be paid at all if their company folds.
Insurance companies that are admitted are to follow guidelines that are set by the department of insurance (DOI) of the state they conduct business in. The admitted insurance company's rates as well as their practices, advertisements and cash reserves are regulated by the DOI and are prohibited from deviating or modifying any business decisions without their approval. Also, admitted companies are part of their states insurance guaranty program, which will pay the claims of clients belonging to an admitted company that becomes insolvent.
Insurance companies that choose to be a non-admitted business are not required to follow state regulations. They would have to prove to be financially able to conduct business. They would not have to report their rates to the DOI and can charge according to their risk exposure. Not only does this allow insurance companies to take on higher risk applicants who have greater loss potential but it also allows for flexibility of form. If you're client isn't being accepted on the admitted market, it is much more likely for you to be able to secure coverage for them on the non-admitted market.
Non-admitted companies may seem to be riskier to do business with, but that isn't necessarily the case. Admitted companies, due to regulations, are sometimes smaller in size and have less cash reserves. Therefore, these companies can have an AM Best rating below what is desirable and can be on the verge of becoming insolvent. The government will back claims made by clients before their ailing admitted company folds, but it may take years to get any compensation. Conversely, non-admitted companies can have the strongest ratings with billions of dollars in their reserve with no threat of losing their solvency.