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What is a Nonstandard Insurance Company?

What is a Nonstandard Insurance Company?
September 21, 2018 Simon Hopes

Many auto insurance companies are referred to as Standard or Preferred companies. This refers to the type of customers they are trying to attract and sell policies too. It all comes back to stability. These companies want to draw the most stable customers, which in insurance lingo are called standard or preferred.

On the other end of the stability, the spectrum is customers who are less stable and therefore have more accidents and losses. The standard/preferred companies tend to stay away from them because they have more accidents. Customers that are referred to as nonstandard or high risk are primarily serviced by specific companies’ set-up to meet their needs. The primary reasons a person would be considered nonstandard are:

They do not keep their insurance coverage continuously active; there are lapses or gaps in coverage. Youthful drivers or people entering the insurance market for the first time also searching for companies which offer a no down payment car insurance. They drive high value, rare, or specialty cars.

The terms “nonstandard” or “high risk” do not apply to the companies, but to the characteristics of the customers. Companies that service the nonstandard or high-risk market fall into two categories:

A separate division, company, or pricing tier of a standard company that is designed to focus on this market. Many companies fall into this group, and when quoting you may not be aware that they are using different pricing rules, etc. when offering you a rate.

A small or regional company that specializes in writing, pricing and servicing the non-standard market. These companies are not affiliated with the larger companies we have discussed. Policies from these companies come primarily through independent agents. Although some of the direct-to-customer companies will have partnerships with a nonstandard carrier to assist their customers who do not meet the underwriting requirements of their program.

First, it is not a bad thing to find yourself being insured by one of the nonstandard companies. If you have not been able to keep your coverage in place or are new to the market, this is where you start. You will need to build stability by maintaining coverage, and then after 6 months or a year, you will be able to qualify for lower rates with one of the standards/preferred companies.

Here are two of the key differences between nonstandard and standard companies:

The price will be higher. Nonstandard companies charge a “premium” for taking on the uncertainty and the higher loss costs associated with, the greater instability.

The policy contract will have more exclusions, meaning that there will be more instances where coverage is limited or not provided. (You might ask how can this be, but remember that the State Department of Insurance approves all contracts. There will be nothing in the contract that is against the law. Instead, standard companies choose to take a more liberal interpretation of the laws and offer additional coverage because they are insuring more “stable” people.)

A Real-Life Story from Inside a Nonstandard Carrier

While most of the companies have been reputable organizations to work for, here are some dreadful experience to share with you. In most industries, there are occasions where you encounter an organization or — more likely — an individual who has questionable ethics. Unfortunately, this person or persons can give a black-eye to a larger group and have a negative impact on many people’s lives.

The name of the organization was changed to protect the majority of good, hard-working people who worked there. For purposes of this story, the company will be called Manure Mutual Insurance Company. I worked for Manure for 1 week and here is my story.

Several years ago, I was courted to work at Manure Mutual and run the Pricing/Underwriting/Actuarial Department. It was a whirlwind courtship where I was flown in on the corporate jet, and I got to name my salary. While I should have asked more questions – it was too good to be true, after all – it appeared to be a great job, in a great location, and the compensation was excellent. So, my wife and I put the house on the market (which we sold in 3 days), and I sped off to Manure to start my new career. The dream was shattered very shortly.

The situation at Manure was grave, which they explained to me in the courtship process. Basically, they had made some mistakes in the pricing models and were rapidly shrinking in two of their largest states. In my first two days on the job, I met with everyone involved, analyzed the situation, and made a written proposal to the President of Manure outlining an action plan for getting the situation under control. I estimated that it would take 30 days to implement and gain approval of the changes with the state’s department of insurance (DOI). The good news was that the changes would actually benefit the customers because rates would go down. This state’s DOI required any program change to go through a prior approval process before implementation.

On Tuesday (2nd day on the job) I met with the president of Manure and presented my proposal. During the course of the conversation, he told me that my plan was unacceptable because too much revenue was being lost. He told me that the program changes needed to go into effect on Friday. I countered that this was not possible because this was against the law. He was unrelenting. Later in the day I returned to talk with the president further and learned that he had rewritten my proposal so that the changes would indeed go into effect on Friday. Basically, leaving me on the hook as the author of the proposal to” break the law.”

That night I went back to the hotel and called my wife (who was still at home in another city) and explained the situation. I even called my prior boss and talked with her. Neither my wife nor my former boss could believe this was happening. They offered advice, and my ex-boss offered me my old job back if I wanted it. I decided to test the waters a little more over the next few days before making a rash decision, so I returned to Manure Mutual’s office. I found that the company needed to get revenue on the books quickly because they were trying to sell the company. They were not interested in the consequences of not gaining DOI approval for their actions because they believed that the company would be sold by the time the DOI found out. So, the president and owners of Manure would be long gone, with money in the bank, by the time these actions came to light.

Because of this, I left the company after less than a week on the job. It was an important lesson for me. The important lesson for you in this story is that it is essential that you research the rating of the company. The rating will give you some level of comfort in knowing that the company you are dealing with is reputable. In this case, Manure Mutual had a marginal rating and eventually went out of business.