Question

Describe the constraints on admitted insurers that create the need for a supplementary market that can accommodate special risks.

Answer 1

At First, We Should know what is “Admitted Insurers” :

An admitted insurer, which can also be referred to as a standard market, is a term used to classify an insurance carrier that is licensed by a state insurance department to do business in the insured’s state. The major benefit of an admitted insurance company is that the insured is protected by the state’s guaranty (insolvency) fund should the insurer become insolvent and unable to fulfill their contractual obligation to pay covered losses. These state funds do not prevent insurer insolvency but they do mitigate its effect by providing payment for unpaid claims. State guaranty funds vary by state, however most have the following characteristics in common:

• Assessments are made only when an insurer fails
• Policies usually terminate within 30 days after the failure date
• Claims are subject to maximum limits
• Most states provide a refund of unearned premium

The constraints on admitted insurers could be summarised like this:

Depending on the type of business in operation, an admitted insurer may be one of the viable options for coverage. Since an admitted insurer is required to file its rates with the State insurance department, it does not allow for greater flexibility in terms of coverage and pricing. A common misconception about a non-admitted insurer company is that it’s riskier to do business with than an admitted insurer; however, the bottom line is the financial strength of a company determines the risk.

Admitted insurer often can’t charge high enough premiums to safely insure high-risk events, but non-admitted insurer have no such restriction. As a result, non-admitted insurers are usually the only ones available to offer specialty insurance such as professional liability insurance or earthquake coverage. There are too many consistencies and familiarities are found in the admitted market. For some of the reasons stated above, many producers do not place business with admitted insurers.

Hence we can say that there are too many constraints on admitted insurers that create the need for a supplementary market that can accommodate special risks.