Admitted and non-admitted (surplus lines) insurers

What being admitted means

The NAIC's Nonadmitted Insurance Model Act defines an admitted insurer as one licensed to engage in the business of insurance in the state. The license, usually called a certificate of authority, is issued by the state's insurance department and lists the lines the company may write.

Being admitted brings the insurer under the state's full regulatory structure:

• Rate and form filing. The company's rates, rating rules and policy forms are subject to the state's rating and form laws, which may require prior approval, filing at or before use, or no filing, depending on the state and line. See Rate, rule and form filings and Prior approval, file-and-use and use-and-file.
• Guaranty fund participation. Admitted insurers are members of the state's property and casualty guaranty association, are assessed to fund it, and their policyholders' covered claims are paid by it if the insurer becomes insolvent.
• Market conduct oversight. The department can examine how the company sells, underwrites, rates and pays claims, and consumers can bring complaints to the department.
• Residual market participation. Admitted insurers writing a line are commonly required to share in that line's residual market mechanisms, such as FAIR plans and auto assigned risk plans. See Residual markets.
• Premium taxes and reporting. The insurer pays premium tax and files financial and statistical reports with the state.

The surplus lines market

The NAIC describes the surplus lines market as non-admitted specialized insurers covering risks that are not available in the admitted market. It includes U.S.-domiciled insurers, Lloyd's syndicates and non-U.S. insurers on the NAIC's Quarterly Listing of Alien Insurers.

Surplus lines insurers tend to write new coverages and unusual or hard-to-place risks, where limited loss history makes standard actuarial pricing difficult. Once a coverage builds enough data and demand, the NAIC notes, it may move into the admitted market.

Freedom of rate and form

A defining difference is that surplus lines rates and policy forms are generally not filed with or approved by the insured's state. As the NAIC puts it, it is the surplus lines transaction that is regulated, not the product. The conditions fall instead on who may place the business and when.

Insurer eligibility

A surplus lines placement must be with an eligible insurer. Under the NAIC model:

• an insurer domiciled in another U.S. state must be authorized to write the type of insurance in its home jurisdiction and have capital and surplus of at least the greater of the state's minimum or $15 million (a commissioner may accept less on specified findings, but never below $4.5 million);
• an insurer domiciled outside the United States must be on the NAIC Quarterly Listing of Alien Insurers.

U.S.-domiciled surplus lines insurers are financially regulated by their domiciliary state; alien insurers are reviewed through the NAIC's International Insurers Department.

Diligent search and export lists

The model act allows a placement, other than for an exempt commercial purchaser, only when the full amount or type of insurance cannot be obtained from admitted insurers, after a diligent search among admitted insurers actually writing that type of insurance in the state.

States implement this differently. The model's drafting notes say diligent search rules vary in the number of declinations required and who must conduct the search, and that some states allow placement without a search. Some commissioners maintain an export list of coverages for which no admitted market exists and waive the diligent search for those coverages. The model act has the broker file an affidavit with the commissioner on the efforts made to place the coverage with admitted insurers.

Large commercial buyers who meet federal "exempt commercial purchaser" criteria, such as employing a qualified risk manager and meeting premium and size thresholds, can be placed without a diligent search under the federal law and the model.

The surplus lines broker

Because the insurer is not licensed in the state, the licensed surplus lines broker carries the regulatory responsibility. The broker must confirm the insurer is eligible, document the diligent search where required, give the insured written notice that the insurer is not licensed by the state and that the state guaranty fund will not pay claims if it becomes insolvent, file the required reports and affidavits, and collect and remit surplus lines premium tax. Regulators can suspend, revoke or refuse to renew a broker's license for failures such as not filing reports or not remitting tax.

Premium taxes and stamping offices

Under the model act, the surplus lines licensee collects the premium tax in addition to the insurer's premium and pays it to the commissioner. Where a policy covers risks in and out of the state, the whole tax goes to the insured's home state. Some states have created a surplus lines association, often called a stamping office, that receives, records and stamps surplus lines policy documents, checks them against eligibility requirements, and reports to the commissioner. The model act provides for such an association, funded by a stamping fee on each premium-bearing document, and notes that states may choose not to create one.

No guaranty fund protection

Surplus lines insurers do not participate in state guaranty funds, so their policyholders do not have that backstop. The NAIC notes that surplus lines insolvencies have historically been rare, which it attributes to state solvency monitoring.

The federal home-state rule

The Nonadmitted and Reinsurance Reform Act (NRRA), enacted in 2010 as part of the Dodd-Frank Act, simplified multistate surplus lines placements. Under the codified provisions:

• Home-state regulation. The placement of nonadmitted insurance is subject to the statutory and regulatory requirements solely of the insured's home state (15 U.S.C. § 8202).
• Home-state tax. No state other than the insured's home state may require a premium tax payment for nonadmitted insurance (15 U.S.C. § 8201).
• Home-state licensing. Only the home state may require the surplus lines broker to be licensed for that insured's placement.
• Workers' compensation carve-out. The home-state rule does not preempt state laws that restrict placing workers' compensation insurance, or excess insurance for self-funded workers' compensation plans, with nonadmitted insurers.

The home state is generally the insured's principal place of business (or principal residence for an individual). If all of the insured risk is outside that state, it is the state to which the greatest share of taxable premium is allocated. The NAIC amended its Nonadmitted Insurance Model Act in 2023 to align it with the NRRA.

Risk retention groups

A risk retention group (RRG) is a liability insurer owned by its insureds, formed under the federal Liability Risk Retention Act of 1986. An RRG is chartered and regulated in one state but may write commercial liability insurance for its members in other states by registering there. RRGs are not admitted in the registration states in the usual sense and, under the federal law, cannot participate in state guaranty funds.

When business moves between markets

Risks shift between the markets as conditions change. When admitted carriers restrict capacity for a class or region, more of it moves to surplus lines, and it can move back when conditions ease. A coverage that starts in E&S can move to admitted paper once there is data to support filed rates and forms, and a group may move a program between its surplus lines company and an admitted affiliate.

Taking a program admitted means filing rates, rules and forms in each state where required, under that state's rating law and form standards. A program built on individually priced risks or nonstandard wording may need real changes to meet those standards.

Does a filing need to be made?

A quick way to frame the question for a product in one state:

1. Is the writing company admitted in the state for this line? If yes, the state's rate and form filing laws apply, subject to any exemptions.
2. If admitted, is the risk or line exempt? Some states exempt large commercial risks or certain lines from rate or form filing; see Commercial lines filing exemptions.
3. If non-admitted, is it a valid surplus lines placement? Rates and forms are generally not filed, but the broker's eligibility, diligent search, notice and tax obligations apply under the home state's law.
4. Is it a residual market or federal program? Those follow their own filing paths.

The same policy form may need a filing for an admitted carrier and no filing for an affiliated surplus lines company placing the same risk.