For many earthquake insurance consumers in California, having to make a choice between a “non-admitted” and an “admitted” insurance company can be quite confusing. This is due to the fact that most agents are salesman first; doing next to nothing to help you sort out fact from fiction so that you can pick the right policy. On the contrary, I believe in sharing my insurance know-how, giving you the information you need to make a smart insurance decision. I hope to fill in the blanks and help you to understand why in many circumstances the differences between “non-admitted” and “admitted” are not as great as you might think.
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First, let’s define what we mean by the term non-admitted.
Carriers are “admitted” by the California Department of Insurance which means they must participate in the California Insurance Guarantee Fund, its financials are reviewed by the state, and its rates and policy forms must be approved by the insurance commissioner.
Next, let’s examine the key concerns and factors related to “admitted” and “non-admitted”:
CIGA
CIGA is the California Insurance Guarantee Association.
“Admitted” carriers take part in CIGA.
This guarantee fund for the state of California pays claims for insolvent admitted insurers. So, should your insurance company go broke, CIGA will step in to continue to make good on the obligations of the insurer. Unfortunately, this fund has very serious limitations. The maximum amount the fund will pay for any one claim is $500,000. If the insurable value of your property is over $1,000,000 (most condo complexes and commercial buildings are) you are left holding the bag for the shortfall. Would you be able to write a check for $500,000+ in addition to the deductible amount in order to rebuild and fix your property? If you aren’t then the state’s guarantees are not of much value.
A “non-admitted” company does not offer this protection.
Rate Approval
An “admitted” carrier must have its rates approved by the Department of Insurance. This poses a problem when it comes to earthquake insurance because of the reinsurance issue.
Let’s pause for a moment to first explain reinsurance.
Reinsurance is the means by which an insurance company protects itself against the risk of losses. You purchase your policy from an insurance company, who in turn buys insurance from a reinsurer to make sure they will be able to pay their claims. Earthquake carriers are typically heavily reinsured due to the size of potential losses.
The trouble you run into with earthquake insurance and rate approval is the fact that reinsurance premiums that carriers pay can change rapidly. An example of this was that soon after hurricane Katrina hit there was a 300% spike in reinsurance premiums. An elected insurance commissioner is never going to approve the rate increase the insurer needs, making it impossible for the carriers to continue to do business. A quality insurance company when faced with this situation, being forced to write on an admitted basis, will stop writing business and begin to cancel its current business. This is what Allstate did with all of its earthquake endorsements on its condo association policies after Hurricane Katrina.
A “non-admitted” company is free to charge whatever premium it feels is necessary and appropriate, to match its economic realty.
Form Approval
An “admitted” carrier must have all their forms approved by the department of insurance before they can use them. It can take many months or years to get contracts approved by the Department of Insurance. Therefore an admitted earthquake insurance company is limited in what it can write and what coverage it is able to provide. This lends itself to smaller risks once again.
A “non-admitted” company is free to write custom contracts as the insured and the carrier agree.
When writing large property risks an insurance company will many times need to customize the contract to the specific needs of an insured. Think of insuring expensive high tech items such as a satellite, or other unique types of buildings and property. Whenever the need arises for custom clause to the contract , it must be written on “non-admitted” basis.
Financials Are Approved by the State
An” admitted” carrier meets the minimal financial standards set by the state. This is by no means a testament to their solvency or ability to pay claims. This is why CIGA exists. Numerous high-profile admitted insurance companies have gone bust. Examples of these are Kemper, Executive Life, Golden Eagle, HIH, Superior National to just name a few.
A” non-admitted” carrier’s financials have not been reviewed by the department of insurance. That could mean that they are financially weak or maybe not. It does mean that you or an agent that you trust needs to do their homework on the financial strength of the company that you are about to purchase insurance from.
The reason there are only two admitted carriers selling commercial earthquake insurance is because most companies want and need the flexibility of being able to set their own rates and writing their own policy forms. Most are financially stable companies with significant assets behind them. A good example of this is Lloyds of London. The syndicates at Lloyds are all non-admitted in CA. They are non-admitted because they want to charge what they want for premium and be able to craft the policies necessary.
In conclusion, the major question to ask when talking about earthquake insurance IS NOT are they admitted or non-admitted. The real question that needs to be answered is “Is this company financially capable of paying my claim?” That is better determined by a proper review of the company’s AM best rating and financial report, than by whether or not they meet the minimum solvency requirements of the State of California.
If you’d like a free insurance risk review call us at (310) 945-3000 and we’ll be happy to help.
Elliot Katzovitz Insurance Agency. Inc.
