What Is an Admitted Company?
An admitted company is an insurance company that is domiciled in one state but is admitted by another state to transact insurance business. Because insurance licenses are governed by the states, an insurance company must be licensed by each state where it intends to conduct business, and must comply with each state's insurance codes, including financial requirements.
- An admitted company is an insurance company that is domiciled in one state and is allowed to conduct business in another state.
- Insurance licenses are governed by states, therefore, an insurance company must be licensed in that state and abide by its rules and regulations.
- The majority of insurance is purchased from admitted companies as large insurance companies in the country transact business in multiple states.
- Admitted companies stand in contrast to non-admitted companies, those that are not registered to do business in other states.
- Non-admitted companies are typically used for special coverage or for high-risk coverage.
- If an admitted company fails financially, the state will step in and cover any claims; however, this is not the case for non-admitted companies.
Understanding an Admitted Company
An insurance company is considered a "foreign," "alien," or "non-resident" company except in the state in which its primary offices are domiciled. In addition, any person selling insurance of an admitted company must be licensed in that particular state.
Most insurance that people have is insurance from an admitted company, as there are large insurance companies that do business all across the country. For example, State Farm is headquartered in Illinois, but it sells insurance outside of that state. When an individual purchases homeowner's insurance in New York from State Farm, State Farm is an admitted company in New York.
Admitted Company vs. Non-Admitted Company
When most people purchase insurance, they are not looking to purchase from either an admitted or non-admitted insurance company, but rather, are looking for the best rates. In fact, for the most part, non-admitted insurance mainly applies to special circumstances or for high-risk insurance, such as protection against natural disasters.
One of the main benefits for policyholders of an insurance company registering with a state and becoming an admitted company is that if the insurance company fails and becomes insolvent, the state will step in and pay claims. If a non-admitted company becomes insolvent, there is no protection for policyholders or guarantee that their claims will be paid.
Most of the rates for a non-admitted company will be higher because they are not subject to local regulations but a policyholder will be able to take out insurance that they may otherwise not be able to with an admitted company.
Regardless of if you choose an admitted or non-admitted company, it's important to first check the financial stability of the insurance company that you are considering doing business with.
States and Insurance
Ben Franklin was a founder of the insurance business in the U.S. in the 1700s but it wasn't until 1945 that Congress declared in the McCarran-Ferguson Act that states should regulate the business of insurance.
The National Association of Insurance Commissioners (NAIC) noted that, "State legislatures set broad policy for the regulation of insurance. They establish and oversee state insurance departments, regularly review and revise state insurance laws, and approve regulatory budgets."
Yet the quality of regulation in individual states can vary widely by some measures among states. The free-market think tank R Street Institute in 2020 assigned scores in 10 different areas to each state including solvency monitoring, anti-fraud efforts, rating and underwriting freedom, minimizing politicization of regulation, consumer protection, and fostering competitive markets. Only one state got an A+ (Arizona), five states got an A, and two states got an F (Louisiana and New York).
After the financial crisis of 2007-08 and the spectacular failure of insurance giant AIG, some observers said that the American insurance regulation system was too focused on the local market and the protection of policyholders, instead of the global market and the stability of insurance firms.
State regulators, critics say, are mostly concerned about whether insurers can pay out on policies, not whether the system is sound or undue risk is being taken to boost short-term results at the expense of another financial market meltdown.