Admitted insurers are licensed by the individual states. An admitted insurer must get a license in any state where it wants to write policies. Each state’s insurance department regulates these insurers. The regulations will vary by state. Admitted/ licensed insurers must:
1. Allow state regulators to monitor the finances and submit to market conduct audits to see that they are financially sound and using fair and honest business practices.
2. Allow each state to approve the insurer's policy forms and/or rates.
3. Admitted insurers contribute to a state fund, called a guaranty fund that is used to pay claims if any of the licensed insurers were to go bankrupt.
4. Collect insurance premium taxes and remit to the state.
Insurance agents must also be licensed in the states that they write business in. In general they are required to attempt to find an admitted (licensed) insurer to place the insurance risk with. If they cannot find an admitted insurer and have a surplus lines license the agent can place the insurance risk through a Non-Admitted or Surplus Lines Insurer. A non-admitted insurer is not licensed by the state.
Since the non-admitted insurer is not licensed in the state, they are not regulated by the state's insurance department. They are regulated in the state or country where they are domiciled or located. Since they are not regulated by the state, they do not have to file rates and forms with the state. This allows non-admitted insurers to accept a broader range of risks than an admitted insurer because they can craft the coverages and charge an adequate premium for the risk.
Even though the non-admitted insurer is not licensed in a particular state it must be ‘accepted’ to do business in that state. There is a nationwide ‘white list’ of non-admitted insurers that meet the criteria to be accepted in the individual states. Non-admitted insurers do not participate in the state guarantee funds so if a non-admitted insurer goes bankrupt there is no guarantee fund to protect you. Just because a non-admitted insurer is not licensed does not mean that they are not financially sound. Generally non-admitted insurers must meet stickier financial requirements than an admitted insurer.
The non-admitted insurer does not collect premium taxes. The premium taxes are collected by the surplus lines agent, who is responsible to report and pay to the state the taxes collected (surplus lines taxes). In addition it is the responsibility of the surplus lines agent to make sure that the non-admitted insurer meets the requirements of the individual states.
It is important to note that non-admitted insurers are generally able to obtain a license in each state. The non-admitted insurer choses to operate in an unlicensed, surplus line basis.