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 entity'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 could be a smaller amount than what they were paying for. Each state has a cap on how much is to be paid out if an admitted company fails. 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. This allows insurance companies to take on higher risk applicants who have greater loss potential. Insurance companies that cover flood, earthquake, liability and other special risks are mostly non-admitted entities.
When it comes to choosing an admitted or non admitted insurance company, the financial strength of the firm is the most important factor to consider. AM Best, an independent company that rates the insurance companies based on their financial viability, sets the standard for the industry. The ratings are letters (A-S) with signs (+,-). The firms who are solidly solvent have an A++ rating, which means superior and secure. Unfortunately, companies that are struggling or have been placed under review may receive a rating of F or S, which is In Liquidation or Suspended, respectively.
Non-admitted companies may seem to be riskier to do business with, but that isn't the case. Admitted companies, due to regulations, are smaller in size and have less cash reserves. Therefore these companies can have a 'B' or worse rating 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.
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