Risk Management

Admitted v. Authorized Carrier Status

By Betsy Kelley
OMIC Underwriting Manager

[Digest, Winter 2001]

There are many factors to consider when selecting an insurance carrier. Price, coverage features, loss experience, and claims-handling philosophy are critical issues. So are a company’s integrity and financial stability. But what about its admitted status? Does it matter whether a carrier is admitted or authorized?

The Federal Risk Retention Act of 1986 created a new class of insurance company – the risk retention group (RRG) – and removed the regulatory impediments to obtaining licensure in each state of business that previously made it cost-prohibitive for carriers to offer coverage in a wide range of territories. Under the Act, a risk retention group is required to meet the financial and filing requirements in its selected state of domicile and to register with and file a business plan and other financial information in any other state in which it operates.

A major change created by the Act is the distinction between whether a carrier is registered or licensed to legally engage in the business of insurance in a particular state. A risk retention group need be licensed and admitted only in its state of domicile, where it is subject to the regulatory requirements and financial status reviews of that state’s insurance department. At the same time, the RRG can be registered in other states by annually filing in each of those states the necessary financial statements and other required information. Each state has control over registered companies and has the right under the Act to investigate the company’s financial status in the same manner it can investigate the financial status of any licensed insurance carrier operating within the state. Individual states retain authority over consumer protection issues and may investigate complaints against an authorized RRG just as they would against a licensed and admitted carrier. As an added protection, consumers may file complaints with the RRG’s state of domicile.

Unlike licensed and admitted carriers, risk retention groups do not participate in state guarantee funds and are, in fact, prevented from doing so by the Risk Retention Act. This does not mean that they are any more risky, however, and while a few RRGs did become insolvent during their first few years of formation, the vast majority of insurance company failures involve licensed and admitted carriers.

Furthermore, participation in a state fund does not guarantee that aggrieved policyholders will be made “financially whole.” Most funds do not adhere to the rigid actuarial standards that strong carriers such as OMIC follow in establishing reserves. When claims are covered through a guarantee fund, it is possible that payments will run only pennies on the dollar, and in some cases, may not be covered at all.

Instead of relying on a guarantee fund to provide security in the event of insolvency, a carrier should prevent insolvency by maintaining strong financial reserves, collecting actuarially sound premiums, purchasing reinsurance from a reputable source with a reasonable retention, properly underwriting applicants, and handling claims efficiently and effectively. If a carrier is following sound financial principles and operating legally, it should not matter whether it is admitted or authorized.

About OMIC
When OMIC was formed nearly 15 years ago, the founders believed a risk retention group would be the most cost-effective and beneficial form of organization in which to operate a nationwide insurance program for ophthalmologists. It would have been expensive and administratively cumbersome to become licensed and admitted in each of the 50 states in which OMIC does business. A risk retention group remains the most effective form of organization in which to operate and allows OMIC to keep premiums affordable.

OMIC is domiciled and licensed in the state of Vermont, a strong regulatory jurisdiction known for its excellent reputation and record and accredited by the National Association of Insurance Commissioners. OMIC’s independent financial ratings are superior to many licensed and admitted carriers. OMIC maintains an A- (Excellent) rating with A.M. Best. OMIC’s solid financial condition and strong ratings are due in part to loss experience that is 30% better than the expected industry standard for ophthalmology nationwide as well as to its comprehensive underwriting guidelines, particularly with respect to refractive surgery.

OMIC has three sources of funding for the payment of claims. First, OMIC collects premiums that are actuarially developed to cover anticipated losses. Then, OMIC purchases reinsurance from respected companies to help support large losses. Finally, OMIC maintains adequate surplus in the unlikely event that premium and reinsurance are insufficient to cover actual losses.

OMIC enjoys the support and exclusive sponsorship of the American Academy of Ophthalmology and is recognized as an approved carrier by 11 ophthalmic subspecialty and state societies. OMIC is a member of the Physician Insurers Association of America.

If you have questions about OMIC’s carrier status, please contact Betsy Kelley at (800) 562-6642, ext. 630 or bkelley@omic.com.