Startup Risk Tips: Admitted / Non-Admitted Insurance Policies

Q: What’s the deal with “admitted” insurance carriers vs “non-admitted” insurance carriers?

Insurance quotes are a pain to read.  If you’re not in the industry, most of the terms might seem like complete jibberish.  One term that comes up is the whether the policy is with an Admitted or Non-Admitted insurance carrier.  Here’s the deal:

Admitted Insurance Policies:

Think of admitted insurance policies like bank accounts at FDIC-insured banks.  As a regulatory body, the FDIC creates a set of standards/rules that banks must meet in order to become FDIC-insured.  If the bank meets these standards, they can qualify for government assistance in the case of a run on the bank or something otherwise going wrong.  It creates an extra cushion for the account holder: if the bank fails, the government (FDIC) will pay out.

Admitted insurance policies are the same thing for the insurance industry.  The soon-to-be admitted insurance carrier has to jump through a bunch of state regulatory hoops to gain admitted status.  Once admitted, the policies the carrier writes in-state are backed by the state’s insurance authority.  The policyholder then has an extra cushion just as with an FDIC-insured bank account.

Non-Admitted Insurance Policies

Non-admitted insurance policies are just that: written by a carrier not yet “admitted” by the state insurance authority.  As such, non-admitted policies don’t have extra backing from the state if the insurance carrier goes under.  The insured will have to pay “surplus lines taxes” on the policy because of its non-admitted status.

Why should I care?

At first glance it probably seems like admitted insurance policies are the only way to go.  This isn’t the case though.  Here’s why:

1. Coverage: Just because the policy is admitted doesn’t necessarily mean its better.  A non-admitted insurance policy may actually have more extensive coverage.
2. Explore our pricing structure, where admission status doesn’t dictate costs. A non-admitted insurance carrier might leverage a superior risk management model for underwriting, leading to a more economical offering, even when factoring in additional tax expenses.
3. Stability: Admitted insurance policies have backing from the state, but if state assistance is required, you should’ve never worked with that carrier in the first place!  There’s something called the A.M. Best Rating system that rates and classifies insurance carriers’ financial strength on a letter grade scale.  An A+ non-admitted insurance carrier (like Lloyd’s of London, for example) is a much better bet than a C-rated admitted insurance carrier.