Non-admitted (US, adj). Applied to insurers and reinsurers, non-admitted is the American nomenclature used to describe those risk carriers which are unlicensed in a particular US state. It stands alongside the peculiar descriptor 'alien', which refers to companies domiciled entirely outside the US. All aliens are non-admitted everywhere in the Land of Liberty, but companies that are non-admitted in one state may be admitted in others. State regulation means they are treated as outsiders.

Surplus lines

Non-admitted insurers write a huge share of US commercial business, even though their name suggests that they are not to be let through the door.

Another bit of counter-intuitive taxonomy denotes this business as 'surplus lines', but not because they are unnecessary or surplus to requirements (in fact exactly the opposite is true - they are critical). However, surplus lines exceed the admitted market's ability or appetite to underwrite risk, so the guardians of the local insurance economy are forced to lower their defences and let the non-admitted insurers step in. Provided an intrepid broker can get three local carriers to turn down a risk, non-admitted companies can carry it, and the day.

All this could change, but only if US state insurance supervisors agree to make each other's insurers as welcome as their own. A passporting model like the one in the European Union would allow US non-admitted companies to operate freely in all states, but is not on the cards. Creating a federal regulator for non-admitted insurers is another option, but the National Association of Insurance Commissioners (NAIC), a club for state commissioners, has said it will not demur to such a plan. They like their fiefdoms.

Meanwhile the Council for Insurance Agents & Brokers (CIAB), a club for commercial brokers, says it is "critical to the long-term viability of the US insurance industry" that the current system of state regulation must be modified. If they had their druthers, it would be underpinned by one federal regulator. Perhaps this is because CIAB members are extremely fatigued spending hours pointlessly presenting risks to insurers whom they know will not underwrite them before approaching those who will.

Risk managers also prefer the federal approach, but the industry is split.

Roadmap to reform

A compromise solution is in sight: the Oxley-Baker "roadmap to state-based insurance regulatory reform" was floated in March by federal legislators (and has nothing to do with that other newsy roadmap). It would end government control of insurance prices (the existence of which seems bizarre in the US, champion of the free market), seek more consistent (but not reciprocal) agent and insurer licensing around the country, and improve communication between state regulators and the feds through a six-member committee (which might, but probably won't, have the authority to make states actually comply with the roadmap). However, bells would not ring over the death of non-admitted insurers, because the roadmap rejects federal regulation - a decision which ensures the buy-in of state regulators.

Non-admitted reinsurers are also involved in regulatory struggle. For ages they have been lobbying for equal access to the US market, which requires them to post cash or other assets to cover their future liabilities to US customers to the tune of 100%. Lloyd's, for example, maintains a multibeneficiary US trust fund valued at more than $8bn. Obviously, this has a significant associated cost, which non-admitted reinsurers must pass on to cedants and ultimately to policyholders.

An alliance of non-admitted reinsurers, including Lloyd's and the International Underwriting Association, has been hammering away at this issue for years.

It has proposed a special cream-of-the-crop club of reinsurers selected from its number, members of which, because of their financial wherewithal, would not be required to post 100% collateral. In a small victory, US Treasury Secretary John Snow denounced existing collateralisation rules, apparently at the urging of his friend Lord Levene, Chairman of Lloyd's.

Alas, the so-called approved list proposal has been rejected by the NAIC, after fierce resistance (unsurprisingly) by competitors in the Reinsurance Association of America and by US cedants, who quite like the idea of having their reinsurance credit risk eliminated by law.

Solution possibilities

The commissioners have told the warring parties to make friends and come up with a solution that everyone can live with. One idea floated is to make capital requirements for individual reinsurers - non-admitted or otherwise - uniform regardless of geography, and base them on their financial strength. Another is to scrap them altogether, since, for example, an insurer has no collateral for a Swiss Re bond, but demands it for a Swiss Re recoverable, making the rules a nonsense. These arguments are probably non-starters, however, since the aforementioned cedants are unlikely to give away the golden goose, and US reinsurers will never agree to comply with the same rules that non-admitted competitors must deal with. Protectionism doesn't work that way. So non-admitted reinsurers are likely to be around for a while yet, too.