Getting insurance can be challenging if you have an unusual risk, a lot of risk or a hefty claims history. These “hard-to-place” risks are difficult to insure using standard insurance, also known as admitted carrier markets.
Hard-to-place risk
Admitted carriers typically gravitate toward predictable risk with considerable data to back it up. This helps them price premiums correctly to remain profitable and solvent. When there isn’t enough data to accurately predict risks or the known risks are too high, admitted carriers reject insurance applications.
For example, if you had a consultation business in an area prone to political upheaval, you’d have trouble finding an insurance company to underwrite the risk. Alternatively, if you were a high-net-worth individual sitting on multiple boards, your personal liability could surpass typical directors and officers policy limits. Both scenarios would be too risky for admitted carriers, so the non-admitted market would become your best bet.
Custom insurance companies, or “non-admitted carriers,” in the excess and surplus (E&S) lines can help when standard companies won’t.
Non-admitted carriers account for a fraction of property and casualty policies but are vital to the insurance industry. Without them, many clients wouldn’t be able to obtain coverage.
Types of surplus lines coverage
A non-admitted carrier can provide almost any coverage an admitted carrier cannot. If the insurance doesn’t exist, surplus lines are often the lines that create it. Once a new coverage has generated sufficient data, it may even become a standard product in the admitted market.
Individuals and companies might be classified as complex risks for many reasons, making it difficult to find a standard insurer. Here are a few examples of hard-to-insure risks:
- Businesses with extensive loss histories
- High-risk jobs like munition experts, firework technicians and stunt pilots
- High-hazard industries like amusement parks
- Sports facilities and events
- Explosives manufacturers
- Properties in areas prone to disasters, like wildfires, floods, etc.
- High-value real estate and personal property
- Individuals with significant assets or high-risk profiles, like celebrities and CEOs
- Unique or one-of-a-kind risks, such as rare art and private collections
- Highly specialized or novel businesses that insurers don’t have data for
- Unusual construction projects or locations
- New or untested products without loss data available
- Special events and event cancellations, like outdoor concert events
- Vacant properties
- Drug and alcohol rehabilitation facilities
- Hotels and motels
- Hazardous waste processing facilities
- Environmental or pollution damages
Here are some examples of industries and hazards that often fall to non-admitted carriers:
- Professional liability
- Commercial and personal property
- Umbrella and excess liability
- Special event insurance
- Product liability
- Environmental and pollution liability
- Aviation and marine insurance
The Wholesale & Specialty Insurance Association (WSIA) calls the surplus market and non-admitted carriers the “safety valve” of the industry because it insures risks admitted carriers would normally decline.
Admitted carriers versus non-admitted carriers
Here’s an overview of the differences between admitted and non-admitted carriers:
| Features | Admitted carriers | Non-admitted carriers |
|---|---|---|
| Uses standardized forms with some flexibility for add-ons or endorsements | Yes | No |
| Is backed by a guaranty fund that guarantees claims payment if the company goes bankrupt | Yes | No |
| Has a process where policyholders can file complaints with the state agency | Yes | No |
| Must register and be approved or admitted by each state they do business in | Yes | No |
| Must register with the state they’re headquartered (domiciled) in, but not in any other states | No | Yes |
| Charges premiums and follows processes regulated by state agencies | Yes | No |
| Offers highly customized forms and policy terms | No | Yes |
| Charges higher premiums | No | Yes |
| Offers one-of-a-kind insurance | No | Yes |
| Is used more often during hard markets, when insurance is harder to obtain | No | Yes |
| Is used more often during soft markets, when insurance is easier to obtain | Yes | No |
| Requires a licensed agent or broker to sell their policies | Yes | Yes |
More about admitted carriers
Admitted carriers are approved by a state’s insurance department and licensed to sell policies in that state. The insurance company might be admitted in several states, allowing them to underwrite insurance policies in each approved state.
Admitted carriers are subject to the state’s oversight and must comply with its regulations. Each state regulates rates so insurance companies can’t overcharge or undercharge. Their forms, operations, capital requirements and claims handling are also regulated by the state.
Admitted carriers are backed by the state’s guaranty fund, which pays outstanding client claims if the insurance company goes bankrupt. Insurance clients can appeal denied claims with the state if they feel their insurance company handled the claim incorrectly.
Most of the standard insurance companies you think of are admitted carriers.
More about non-admitted carriers
Non-admitted carriers don’t have to be approved by each state’s insurance department to sell their policies there. They only have to register in their headquarters, or “domicile” state. Unlike admitted carriers, non-admitted carriers don’t have to follow each state’s separate insurance regulations and can underwrite policies nearly anywhere.
Non-admitted carriers adjust their insurance premiums to cover risks that might exceed typical state caps. Or they might modify policy definitions or contract language to underwrite the risk and clarify contract parameters.
Additionally, non-admitted carriers don’t contribute to state guaranty funds, so if they go bankrupt, the state will not pay the outstanding client claims. Clients can’t appeal their claims to the state.
International non-admitted carriers
Certain global insurance companies insure individuals and businesses. Non-admitted carriers outside the
U.S. (known as “alien carriers”) still have to follow controls and reviews.
The National Association of Insurance Commissioners (NAIC), through the International Insurers Department (IID), is the primary regulatory force for alien surplus carriers. The IID maintains a list of alien carriers that meet their financial and regulatory standards, such as proof they have enough cash deposits to pay policyholders and creditors.
All non-admitted carriers require licensed surplus brokers to vet and sell their policies. Most non-admitted carriers adhere to strict self-regulation that protects their businesses and policyholders.
Protections for buyers in the non-admitted market
Buying insurance from a non-admitted company may seem like a risky proposition. However, non-admitted companies are usually just as safe as admitted companies.
Policy reviews
The non-admitted lines stamping offices provide an additional level of protection. Stamping offices were created by surplus lines brokers as a form of self-regulation.
After a policy is written by a non-admitted carrier, the stamping office reviews it to ensure it complies with the local laws and regulations. Then, the office stamps the policy as approved, hence the term “stamping office.”
More than two-thirds of surplus lines premium flows through stamping offices.
Specialized brokers and agents
A surplus lines insurance broker is legally required to conduct a diligent search of the admitted market to see if standard coverage is available to you.
According to WSIA, most states require three admitted carriers that write the relevant type of insurance to decline a client’s risk before a non-admitted carrier can take it.
Exported coverage to expedite the application process
One exception to the three denials rule is when a particular type of coverage is assumed to be so risky an admitted carrier wouldn’t ever cover it. The type of insurance is called “exported coverage.” Some states keep an export list of risks commonly sent to surplus lines, such as insurance for the following risks:
- Amusement rides or devices
- Vacant buildings
- Pollution or environmental damage
- Employment practices liability
Exported coverage lists simplify the insurance placement process, since the surplus lines broker isn’t required to do a due diligence search for standard carriers.
Written notices to clients
WSIA also says the surplus lines broker must provide you with a written notice disclosing the following:
- A surplus lines policy is not covered by the state’s guaranty fund.
- Insurance placed with a surplus lines company is not subject to many of the state’s regulations.
These practices are meant to inform clients about their options and how the surplus insurance market differs from the standard market.
Check your non-admitted insurance company’s credit rating
Credit ratings are important for any insurance company, admitted or non-admitted.
Some insurance companies in the non-admitted market are highly rated and well-funded because they understand how to price the risks they take on. They also have specialized protections and response plans in case of a catastrophic claim. Some clients get better protection with a non-admitted carrier because of their financial backing and underwriting knowledge.
If you’re shopping the non-admitted market, you’ll be using a licensed surplus lines broker who adheres to the rules and regulations of your state or country.
Your surplus lines broker should provide recent carrier ratings with your quote. Carriers with an A.M. Best rating of A++ to B+ are considered good. You may find that a non-admitted insurer has a higher rating than an admitted one because the non-admitted insurer is better equipped to handle large losses and has more experience in high-risk markets.
Solvency is essential for insurance carriers and their clients. If they underprice risk, they won’t have enough funding to pay claims.
Homeowners insurance and non-admitted carriers
Non-admitted insurance isn’t just for commercial businesses. Often, non-admitted carriers are a last resort for homeowners who live in high-risk areas, like those prone to wildfires, floods and hurricanes. This is especially true in states that mandate coverage through Fair Access to Insurance Requirements (FAIR) plans. FAIR plans are designed to cover applicants that standard insurers have declined to cover, such as:
- Areas prone to natural disasters
- Houses in need of repairs
- High-crime areas
- Excessive claims
- New homebuyers who can’t find standard insurance
Non-admitted carriers have the regulatory flexibility to modify coverage and pricing in ways that allow them to underwrite hard-to-insure risks with a high probability of losses. For this reason, surplus lines coverage usually costs more.
Contact a surplus lines broker for help
Non-admitted insurance is more expensive, but it insures a risk you could not cover in the admitted carrier market. Over time, you may qualify for standard coverage if you don’t have many claims or you make structural or process improvements that reduce your loss exposure.
Talk to a surplus lines broker if you’ve been denied insurance coverage. They can advise you on coverage options and match you with non-admitted carriers specializing in solutions for your unique risk.
By Applied Systems, Inc.