Non-Admitted Doesn’t Mean Non-Regulated

By:  Timothy Cline, CIRMS and AJ Scott, CPCU, CIRMS

Currently, there are about 43 commercial insurance carriers offering primary or excess coverage for condominium associations in California. But of the 43, only five of the carriers are doing business as a California admitted carrier. The remaining 38 carriers are non-admitted (sometimes called Excess and Surplus Lines or surplus lines) insurers. A common assumption is that non-admitted carriers are unregulated “risk takers.” That perception couldn’t be further from the truth.

Carriers deliberately choose to do business here on a non-admitted basis: Non-admitted insurers are regulated in the state in which the carrier has chosen to be domiciled. For example: Admiral Insurance Company and Chubb Custom are both domiciled in New Jersey, Aspen Specialty is domiciled in Connecticut, Scottdale Insurance is domiciled in Arizona, Markel is domiciled in Illinois, Chubb Custom is domiciled in New Jersey, James River is domiciled in Virginia.

Carriers who are writing volatile perils all share one attribute… they must be “nimble.” One of the reasons CEO’s of insurance carriers indicate that need to quickly respond to a changing environment and that requires them to do business on a non-admitted basis to be sufficiently quick and agile. In a changing environment, admitted carriers simply can’t type up an endorsement, make a rate change—and begin writing policy with the new terms. Instead, admitted carriers must first file a proposed rate and form change and have them approved by the Department of Insurance prior to implementation.  Depending on the complexity of the filing, the process could take as much as nine to twelve months to have the rates and forms approved. If hurricanes, earthquakes, and manmade disasters together cause the reinsurance marketplace rates go up precipitously, a carrier has only two choices: (1) immediately change rates to reflect the higher secondary overhead; or (2) quit writing coverage altogether until the reinsurance pricing comes back down. Non-admitted carriers, by contrast, can simply type up an endorsement and change the rate (if necessary) without having the form approved.

Regulation and licensing requirements. Both the insurance agent/broker proposing the earthquake coverage and the surplus line broker (the intermediary or wholesaler) must have the appropriate license from the California Department of Insurance.

Insurance buyers must sign a disclosure statement (D1 form) acknowledging that the risk is being placed with a non-admitted insurer and that guaranty fund protection (which would be available if coverage were placed with an admitted carrier), is unavailable to the buyer.

The LASLI List. Non-admitted insurers on the LASLI (List of Approved Surplus Line Insurers) must: (1) demonstrate their financial stability, reputation, and integrity; (2) maintain a minimum of $45 million in capital and surplus at all times; (3) have three years’ seasoning (or qualify for an exception); (4) have a valid license to transact insurance in their state of domicile; (5) file financial information with the California Department of Insurance; and (6) adhere to specific capitalization, investment, and solvency standards established under the California Insurance Code.

Regulation of Excess and Surplus Lines has a long history in California. Since 1937, the Insurance Commissioner has been authorized by the California legislature to oversee the regulation of the surplus line industry. To assist with the oversight, the legislature added Regulation 2174 in the California Code of Regulations.

Regulation 2174 is not an anomaly; there are an additional 21 sections which have been added to the California Insurance Code devoted to regulating surplus lines. Sections 1760 through 1780 provide the surplus line broker licensing requirements, policy placement conditions with a non-admitted insurer, and the prerequisites of a non-admitted insurer writing business in California. The results of these regulations are strict financial and operational standards for non-admitted insurers doing business in California.

A variety of coverage can be addressed by a non-admitted carrier.  While we generally think of non-admitted carriers as a way to find a home for earthquake coverage, HOAs who have found themselves hard to insure because of a poor or unprofitable loss activity may find Excess and Surplus Lines facilities willing to offer coverage when no one else will.  According to the Surplus Lines Association of California, the top five coverages written with Excess and Surplus Lines insurers in California last year were commercial general liability, commercial earthquake, commercial property, professional liability (E&O and D&O), and special multi-peril coverage.

Under the leadership and oversight of the Insurance Commissioner, the California Department of Insurance is committed to maintaining a responsive and lawful California surplus lines market that protects the policyholders and to maintain a healthy, fair and competitive surplus line marketplace in California to protect the interests of the California consumer.