Certificate Of Authority

Reviewed by
Darrel Pendry
Updated: 10 June 2024

What Does Certificate Of Authority Mean?

A Certificate of Authority (CA) is a license issued by the state to an insurance company that allows the company to conduct its business. Insurance companies acquire COAs by sending an application to the state along with all of the required documentation.

Insurance companies have been around for hundreds of years and play a vital role in the stability of the global economy and encouraging businesses and individuals to take the risks required to grow and expand. Without insurance companies around to spread the risk, growth would be much more conservative as everyone would need to play it safe and keep cash in reserve to pay for large, sudden and unexpected losses.

Think about it this way: how likely would a bank be to loan a business money to purchase a new piece of expensive production machinery if there was no insurance to pay if something were to happen? Or how likely would a bank be to loan you money to buy a home if they had no way of getting that money back if your home burned down in a fire?

Because of the key role insurance companies play in our global financial system and economy, they are going to be heavily regulated by the government. Part of that regulatory process involves a strict vetting of new or existing insurance companies that wish to do business in their jurisdiction to ensure they are financially stable and doing business for the benefit of the greater public. This is accomplished through the application process to get a Certificate of Authority to operate an insurance company in that jurisdiction.

Insuranceopedia Explains Certificate Of Authority

Certificates of Authority are managed by the state’s department of insurance. The department of insurance licenses insurance companies but also non-residents who want to put up a business in the state. An insurance company that is headquartered in Texas but wants to open up a new branch in New York will need to acquire a Certificate of Authority from the insurance department of New York before its new branch can start operating.

Requirements may vary from one state to another, since insurance laws are statutory rather than federal. Regardless of the specifics of each jurisdiction’s regulations, the goal of the state regulator is to ensure fair terms and the financial stability and solvency of the insurance company that proposes to do business in that state.

To achieve this, states issue a Certificate of Authority to operate in their jurisdiction to insurance companies who have passed their application process. During this process, regulators typically look at a few things:

  1. Business Plan

Regulators will want to see the business plan for the company for the next few (typically three) years to evaluate your proposed activities by line of business, a market analysis, sources of capital, a pro forma financial statement, and solvency ratio calculations (typically 300% of the proposed business plan). They will also want to make sure these figures and projections are stress tested for financial stability.

  1. Actuarial Calculations

They will want to see how you propose to price your insurance products, risk appetite, and a detailed analysis of all the risks your company might be exposed to including: market risk, credit risk, operational risk, regulatory risk, and strategic risk

This definition was written in the context of Insurance Companies or Carriers. In order for an Insurance Brokerage to begin operations, they would also seek a Certificate of Authority from an insurance company to be able to sell their products to the public.

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

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