"Admitted vs. Non-Admitted Insurers - A Primer"
Insurers such as AIG, Chubb, CNA, Zurich, Hartford, and Travelers are simply holding companies with multiple subsidiaries. The subsidiaries are either admitted or non-admitted in the states where they are licensed to do business. Typically, the risk profile of an insured, and the risk appetite of the insurer and their reinsurer(s) will dictate whether an underwriter will issue a quote through an admitted or non-admitted subsidiary.
In analyzing the differences between admitted vs. non-admitted insurers, we need to first consider an insurance policy's primary function. The definition of insurance is a "promise for reimbursement in the case of a loss." Every insurance policy includes an insuring agreement that states that the insurer is legally obligated to pay for damages as a result of a covered loss. However, if a carrier becomes insolvent and cannot fulfill their promise to provide claim coverage and management, the Guaranty Fund of the state in which the insured is domiciled may step in to provide protection for new claims and possibly claims that were reported pre-insolvency. Guaranty Funds only provide this protection to policies that are issued by an admitted carrier. Non-admitted carriers do not receive similar protection.
The National Conference of Insurance Guaranty Funds (NCIGF) states that Guaranty Funds exist to fulfill each state's statutory role in providing protection to policyholders and claimants of insolvent admitted insurers. The NCIGF's goals and strategies are paraphrased as follows:
The types of insurable risk that are prevalent across the U.S. differ broadly from state to state. Therefore, the regulatory body for the insurance industry is located at the state level. In fact, there is little to no regulation or intervention on a federal level except for several federal backstop programs that are in place, i.e., Flood, Crop, and Terrorism insurance. Therefore, the coverage provided by a Guaranty Fund is state mandated, and the amount of coverage provided differs from state to state and by line of coverage.
Insurers admitted in each state are required to pay annual assessments in order to fund the respective Guaranty Funds. State statutes determine the "limits" of the Guaranty Funds, which pay for claims at the lower of (a) the policy limit; or (b) the state's statutory limit. Limits vary by state but the claim limit is typically $300,000, except for Workers' Compensation claims, which are paid in full (Workers' Compensation is always written through an admitted insurer). Some level of coverage is provided through Guaranty Funds on most lines of coverage, i.e., Property, General Liability, Auto Liability, and Umbrella Liability.
As previously mentioned, coverage through the Guaranty Fund only applies to admitted carriers. Admitted carriers are licensed to do business in the state in which the insured is domiciled, and subject to the rules, regulations, and supervision of the respective state insurance departments. In addition, premium rates for admitted carriers are typically filed with the state, and the amount of regulation of these rates varies by line of coverage. As a result, pricing from admitted carriers may not be as aggressive as pricing from non-admitted carriers. Coverage through admitted carriers may not always be available due to the insured's risk characteristics.
Non-admitted carriers (also referred to as Excess and Surplus Lines (E&S) Markets) have a different appetite for risk than admitted carriers. Typically, risks are written with non-admitted insurers when the product or service provided by the insured lends itself to a higher likelihood of catastrophic loss. Many times pricing is more competitive through non-admitted insurers, and since the state insurance department does not regulate non-admitted carriers, they can provide greater flexibility in coverage terms and conditions.
A portion of an admitted insurer's premium is allocated to state taxes. Since non-admitted carriers are not regulated by the state, the state requires the insurer to impose a 3-5% surplus lines tax on the insured. The percentage amount varies by state. Also, there is no protection through the Guaranty Fund if the carrier becomes insolvent, which means that the policy holder would become "self insured" for the period that they were insured with the non-admitted carrier.
The American Association of Managing General Agents website indicates that studies show that the percentage of excess and surplus line carriers that become insolvent are lower than the percentage of admitted carriers. It is to be noted that even though non-admitted carriers are unregulated by the state their financial stability is still monitored by various independent rating agencies.
In summary, it is important that every insured understand the following:
Josh Warren is Director, Client Service at Equity Risk Partners. Equity Risk Partners is the only full service insurance brokerage and risk management advisory firm dedicated exclusively to the needs of the private equity industry and its portfolio companies. For more information, visit www.equityrisk.com. Mr. Warren can be reached at 312-980-7853 or at firstname.lastname@example.org.