Certificate Of Authority

What Does Certificate Of Authority Mean?

A Certificate of Authority (CA) is a license issued by the state that permits an insurance company to conduct business. Insurance companies obtain a CA by submitting an application to the state along with the required documentation.

Insurance companies have existed for hundreds of years and play a critical role in the stability of the global economy by encouraging businesses and individuals to take the necessary risks for growth and expansion. Without insurance companies to distribute risk, growth would be more conservative, as individuals and businesses would need to reserve funds to cover large, sudden, and unexpected losses.

Consider this: how likely would a bank be to loan money to a business for expensive production equipment without insurance to cover potential losses? Or, how likely would a bank lend you money to buy a home if there were no insurance to recover the loan in case of a fire?

Given the essential role insurance companies play in the global financial system and economy, they are heavily regulated by governments. As part of this regulation, new or existing insurance companies that wish to operate within a jurisdiction must undergo a strict vetting process to ensure they are financially stable and serving the public interest. This is done through the application process to obtain a Certificate of Authority to operate in that jurisdiction.

Insuranceopedia Explains Certificate Of Authority

Certificates of Authority are managed by the state’s Department of Insurance. This department not only licenses insurance companies but also non-residents wishing to establish a business in the state. For instance, an insurance company headquartered in Texas that wants to open a new branch in New York must acquire a Certificate of Authority from the New York Department of Insurance before the new branch can commence operations.

Requirements may vary from one state to another, as insurance laws are statutory rather than federal. Regardless of the specifics of each jurisdiction’s regulations, the goal of state regulators is to ensure fair terms, as well as the financial stability and solvency of insurance companies proposing to operate within their state.

To achieve this, states issue a Certificate of Authority to insurance companies that have successfully passed the application process. During this process, regulators typically examine several factors:

1. Business Plan
   Regulators will review the company’s business plan for the next few years (typically three) to evaluate proposed activities by line of business, conduct a market analysis, assess sources of capital, and review pro forma financial statements and solvency ratio calculations (usually requiring a solvency ratio of 300% of the proposed business plan). They will also ensure that these figures and projections have been stress-tested for financial stability.
2. Actuarial Calculations
   Regulators will require a detailed explanation of how the company plans to price its insurance products, its risk appetite, and a comprehensive analysis of all potential risks, including market risk, credit risk, operational risk, regulatory risk, and strategic risk.

This definition applies specifically to insurance companies or carriers. For an insurance brokerage to begin operations, it must also seek a Certificate of Authority from an insurance company to sell its products to the public.

It should not be confused with the certificates of authority that insurance companies issue to their agents.