The morning after Hurricane Milton made landfall in Florida in October, Terrence McLean sat thousands of miles away, sensing opportunity.

Yes, SageSure, the insurance company he co-founded, could face a spike in claims as millions returned to their flooded, wind-torn homes. But he predicted that new customers, abandoned by other insurers, might soon be flocking to a special product he had introduced to Florida only two years ago: Surechoice Underwriters Reciprocal Exchange, or SURE, which had already grown to nearly 20,000 policies by the end of September.

That’s because SURE is a type of lightly-regulated insurance known as “non-admitted,” largely absent in residential property until recently. Most insurance is highly supervised by the government, with states monitoring the quality of insurers, reviewing contracts and limiting price hikes. Conventional companies are backed by what is called a guaranty fund, meaning even if the company goes bankrupt, customers will still get their claims paid. Non-admitted companies have none of those protections. They’re more commonly found in the commercial real estate industry, and were designed for properties that face unique and relatively rare risks, like a fireworks factory or nuclear waste project.

But climate change is supercharging storms, floods and fires and making them more common. Conventional insurers are determining that houses in places struck often by extreme weather are too risky to insure, canceling hundreds of thousands of policies. In the last two years, seven of the 12 biggest home insurers have limited their coverage in California. For those whose policies have been dropped by major insurers, non-admitted insurance is one of their only remaining options for coverage. It means regular homes in some parts of the country are now viewed by the insurance industry as the equivalent of a fireworks factory.

“Does an event like Milton bring more business into the non-admitted market?” McLean asks. “That’s almost certain.”

It’s not just Florida. The wildfires and hurricanes walloping California, South Carolina and Louisiana are pushing consumers into non-admitted policies. Companies behind this coverage take in less than 2% of all US homeowners insurance premiums, but their share of the market for residential insurance has nearly doubled over the past decade. Between 2022 and 2023, non-admitted home insurance premiums grew 27.5%, compared to 13.8% in the admitted market, according to data from S&P Global Market Intelligence.

The number of non-admitted homeowners policies in Florida grew 73%, to more than 92,000, in the 14-year period that ended in 2023, according to data from the Florida Surplus Lines Service Office, or FSLSO, a nonprofit established by the state to oversee and collect data from the state’s non-admitted market. That’s down from a peak of more than 155,000 in 2019, the year after Hurricane Michael hit the state. In California over that same period, the number of transactions in the non-admitted market increased almost 200%, according to the Surplus Line Association of California. So far this year that number more than doubled to 153,661.

Ronald Assise is a Bonita Springs, Florida-based insurance broker, who’s been working with the Horton Group for around two decades. He’s seen extreme weather shake up the insurance landscape, particularly after a direct hit from Hurricane Ian in 2022. Bonita Springs missed the worst of Milton, but it did get pummeled by the storm’s tornadoes. For Assise’s clients, non-admitted policies have been an essential answer to a growing problem.

“Twenty years ago, when we talked about a non-admitted solution, it was kind of a dirty word,” he says. “It was this place you go when you can’t get anything in the normal market. That dynamic is changing rapidly because of market conditions, and it’s not a dirty word at all anymore.”

Depending on who you ask, this phenomenon is either evidence that the market is working as it should — with non-admitted insurers providing a necessary relief valve — or it’s a flashing warning sign that people should not be living in these areas. Charles Nyce, professor of risk management and insurance at Florida State University’s College of Business, says it can be both. After all, it’s not easy to incentivize people to move out of dangerous areas. “It’d be very difficult for the state of Florida to say we can’t live in Miami Beach anymore — and that’s the problem,” says Nyce. On the other hand, non-admitted policies tend to be much more expensive and, “Anything you do to distort prices will change people’s incentives.”

Many big names in the insurance industry, like American International Group (AIG) and Berkshire Hathaway Inc., have non-admitted subsidiaries. Customers can take some comfort in the idea that a large, established business is behind this unusual type of insurance. But in Florida, non-admitted companies tied to household names are becoming risk averse and slashing the number of policies, according to data from the FSLSO. That opens more room for newer, smaller companies to sell to desperate homeowners, gobbling up an expanding sector of the marketplace.

Startups like SURE, Kin Interinsurance Network, and Orion180 Insurance Company are popping up across the country. But by some important measures, several of these smaller companies are not as financially sound as their more-established peers, or are structured in a way that makes steep price hikes likely. A Bloomberg Green analysis of some of the fastest-growing non-admitted insurance companies found: growing losses in the tens of millions of dollars for multiple years straight, little capital, huge dependence on reinsurance (insurance for insurers) and low or no ratings from AM Best, the largest and most trusted insurance rating agency in the world. It adds up to an increasingly checkered landscape that insurance brokers and homeowners must wade through with new caution.

The rise of these startups in a staid industry speaks to a change in the attitude of some state regulators. Once they saw their role as protecting consumers. Now they are desperate for insurers to offer policies to homeowners in their states, even if it means the new entrants into the market have a weaker financial profile than traditional companies.

John Ford, a spokesperson for the Louisiana Department of Insurance, says he has no interest in regulating non-admitted companies. He doesn’t want to do anything to deter any home insurer — admitted or non-admitted — from doing business in the state. “If we don’t have anyone else writing [policies] here, then it’s actually anti-consumer,” Ford says. “We need them.”

If home ownership is a cornerstone of the American dream, home insurance is the silent buttress. Banks only give mortgages because they are sure their investment is covered over the 30-year length of the loan, even in case of fire or storms. Home insurance is so important that states dictate many of the terms.

In most states, insurance companies must submit extensive financials. Language in standard contracts must be reviewed to make sure homeowners aren’t getting nasty surprises. Often, price increases must be applied for. California has a ban against annual price increases of 7% or more on any home policy without the state’s approval. Most importantly, insurers must put money into a guaranty fund. Like the banking system’s Federal Deposit Insurance Corporation, state insurance funds guarantee a homeowner’s losses up to a certain amount if their insurer goes bankrupt.

During stable times, virtually 100% of homeowners insurance is supplied by conventional “admitted” companies, many with recognizable names: State Farm, Allstate, Liberty Mutual. The climate crisis has scrambled that equation, especially for owners of expensive real estate.

If a conventional insurer drops you because your home is deemed too risky, and no other major carrier will sell you a policy, you might turn to the state-backed option, often known as a “last resort” plan for desperate homeowners. In Florida and Louisiana, this is called Citizens Property Insurance Corp.; in California, it’s the FAIR Plan.

State-backed insurance plans provide limited coverage. In Florida and Louisiana, Citizens will only cover damage up to $1 million; in California, the FAIR Plan covers up to $3 million. That means those government-backed policies of last resort, are not, in fact, the last stop for you if your home is worth millions of dollars. If you’re looking to cover your expensive investment, and major insurers won’t touch it, you need something else. That’s why non-admitted startups are prevalent in wealthy enclaves like East Hampton, Palm Beach and Beverly Hills.

The fact that non-admitted companies are bound by significantly fewer regulations gives them more flexibility to raise prices and tailor coverage. That means they can charge whatever they want from year to year. And with their high prices and willingness to take on properties rejected by other insurers, they send a real risk signal to the market.

In the wake of a bad hurricane or fire, it’s not unusual for major insurers to drop a swath of homeowners, and that’s when non-admitted policies will often spike. In 2020, Napa Valley, California residents Jeff and Janie Green were covered by AIG, paying around $3,000 a year to insure their six-bedroom home. Then the Glass Fire swept through their neighborhood while leaving their property with relatively little damage. AIG still raised their rates around 33%, Jeff says, before dropping them all together. “They couldn’t get rid of us fast enough,” he says. “Everybody was getting canceled. It’s the ongoing talk around — jeez — everywhere. Everywhere. Everybody. All over the state.”

First the Greens turned to the FAIR Plan, which came with another nearly 200% increase in cost annually. But the FAIR Plan only covered the structure of their house and didn’t include any of their personal belongings, Jeff says. Eventually they ended up with a non-admitted carrier with a price tag of $15,000 annually.

Doug Heller, director of insurance at the Consumer Federation of America, is alarmed by the rapid growth of non-admitted policies in the homeowners market — especially the smaller startups that aren’t tied to a household name.

“We’re dealing with a whole new crop of players that aren’t backed by the guaranty fund, that aren’t backed by a multi-hundred billion dollar corporation,” says Heller. “It’s really concerning. They’re bringing more risk to consumers than consumers are equipped to bear or trained to understand.”

Sean Harper, co-founder and chief executive of Kin Insurance Inc, which runs one of the fastest-growing non-admitted players in Louisiana, downplays the differences. His non-admitted business isn’t backed by the state guaranty fund, but consumers can still evaluate his company’s credit rating and the reinsurance companies Kin works with. “The customers, they can see the offer in front of them,” he says. Kin plans to expand into California next, Harper says.

Bankruptcy rates are in fact similar between admitted and non-admitted carriers, says David Blades, associate director of industry research and analytics at insurance rating agency AM Best. So there’s no reason to believe non-admitted carriers are any more likely to fail. But in the worst-case scenario for a homeowner with a non-admitted carrier — a disaster generating thousands of claims at once, causing a bankruptcy—there will be no guaranty fund. Homeowners like the Green family would be on their own to replace everything.

This is something that has crossed Jeff Green’s mind. “It’s a concern,” he says. “But what else are you going to do?”

In 2023, the US experienced 28 weather and climate disasters that each cost at least $1 billion — a new record according to the National Oceanic and Atmospheric Administration. Non-admitted startups say they are best positioned to offer insurance to consumers in this increasingly expensive world.

“It’s regulators and regulation that creates the problems,” says Ken Gregg, the chief executive and founder of Orion180 Group Inc, which operates in both the admitted and non-admitted markets. “A lot of times the regulators won’t allow creativity,” he adds. But as a non-admitted company, one of Gregg’s subsidiaries, Orion180 Insurance Company, can move into “the high risk areas,” providing coverage to people struggling to find it because he has freedom to raise prices as much as he wants.

Amid that decreased oversight, the company has been able to grow quickly, even with a lower-than-usual amount of capital. Orion180 Insurance Company only wrote its first policy in December 2022, and in 2023 it was already the second largest non-admitted home insurance company in the US by premiums, according to S&P data. Today, Orion180’s non-admitted business covers about $45 billion worth of property in Alabama, Mississippi, Georgia, South Carolina and North Carolina. In all of those states except Georgia, it’s the biggest player, making up at least a third of the non-admitted homeowners market, S&P data show. Gregg says he’s planning to enter Florida’s insurance market as a non-admitted firm in January.

There’s been little barrier to entry in these states, despite the fact that Orion180’s reported capital in its latest annual filing was low enough to trigger inquiry from the insurance commissioner in the company’s home state.

Orion180 has what is known as a very low risk-based capital ratio, which is a metric regulators typically examine carefully as a measure of an insurer’s financial health. Such ratios demonstrate whether a company has enough money to meet potential financial obligations, like claims after a big storm. A low ratio means the company might not have enough capital on hand considering the risk they’ve absorbed.

In 2023, the median risk-based capital ratio of an insurance company was 10.97, according to the National Association of Insurance Commissioners, or NAIC, a standard-setting group. For a ratio under 2, the NAIC recommends that an insurance commissioner demand a plan for improvement. Orion180’s risk-based capital ratio is 1.47, according to its 2023 annual filing.

“That’s just way too low,” says Ishita Sen, a Harvard Business School assistant professor of business administration. “One big storm could put you under — not even a big storm. A small storm could put you under.”

Since that filing, the company has raised its capital to $37 million, according to Gregg, which would increase its ratio to a level that’s still far below the median but above the level that warrants regulatory action from a state commissioner. “Beyond meeting and communicating with the commissioner, there was no need for a formal plan because Orion180 rectified the issue immediately,” Gregg says.

Another fast-growing non-admitted company is Harper’s Kin Interinsurance Network, a subsidiary of Kin Insurance, which calls itself a “technology company that provides very high quality homeowners insurance.” Kin sells both admitted and non-admitted insurance. But it’s the latter where the growth opportunities are largest. Its non-admitted business is in Louisiana, where its share of premiums in the non-admitted homeowners market has grown from less than 3% in 2021 to nearly 13% in 2023, according to S&P data. It covers 4,721 households there worth $1.8 billion altogether, according to Angel Conlin, Kin’s chief insurance and compliance officer.

The company plans to start selling non-admitted policies in California soon, says Conlin and Harper, Kin’s CEO. “The admitted market — even with the best of intentions — it’s a bureaucracy that just takes longer,” Conlin says. In the non-admitted market, by contrast, “you can react instantly. And frankly, we’re just in a moment in time where Mother Nature has made it that you need to be able to react instantly.”

Founded in 2016, Kin operates as a direct-to-consumer, meaning there’s no independent broker to help homeowners parse a contract and understand the company’s finances.

Kin is heavily reliant on a financial instrument called a surplus note, allowing it to borrow $148.5 million from its parent company to make up for its growing losses. If its parent company runs out of money or if a regulator asks Kin to pay interest on the loan, “Kin would be insolvent,” says Birny Birnbaum, director of the Center for Economic Justice and a longtime insurance economist. He was one of several financial and regulatory experts who reviewed Kin’s publicly available financials at the request of Bloomberg Green. All of them echoed these concerns.

Birnbaum called the company a “financial basket case.” Harper says Kin’s use of surplus notes is a characteristic of its structure as a reciprocal exchange, an increasingly popular type of insurance company in catastrophe-prone areas, and that Kin’s financial picture is a reflection of the fact that it’s a fast-expanding startup. “Surplus notes are the normal way to fund a reciprocal exchange,” Harper says. “Your experts might not like reciprocal exchanges, but they are an important part of the insurance industry.”

Terrence McLean’s SURE has also quickly ascended to one of the top non-admitted players in Florida. SURE started writing policies there in 2022 and now is the second biggest non-admitted home insurer in the state after Underwriters at Lloyd’s, London, according to data from the FSLSO.

In contrast to more traditional home insurers, SURE has an unusually high reliance on reinsurance. That means SURE is passing on all of its risk to reinsurers. SURE sent more than 100% of its premiums to reinsurers for the past two years — tens of millions of dollars more than it collected from customers.

Kin and Orion180 also have abnormally high reliance on reinsurance, passing on 82% and 94% to reinsurers, respectively. CEJ’s Birnbaum and Sen of Harvard both say this ratio is usually flipped, with insurers only typically sending closer to 20% of premiums to reinsurance. Anything more than 80% is concerning.

The reason that might cause concern among SURE, Kin and Orion180 customers is because those companies aren’t in full control of the pricing structure; consumers will almost certainly have to pay higher prices down the line, when reinsurers raise their rates. And there’s no regulation of the prices they charge, so there’s nothing stopping them from hiking rates each year.

McLean doesn’t dispute SURE’s high reliance on reinsurance, though he says it is not as extreme as it looks on paper. In high-growth businesses, there will be some “front-running of insurance costs,” he says. He agrees that his prices are susceptible to sharp increases from reinsurers. “The whole business is subject to that,” he says. Kin’s Harper echoes that sentiment, saying customers will have to pay for the cost of reinsurance, but argues that it’s a necessary feature of the business model of an insurer in hurricane- or wildfire-prone areas. “To buy less reinsurance would be completely irresponsible,” he says. Gregg, of Orion180, says that the business is structured in a way that enables it “to stay in the markets rather than having to restrict capacity, reduce capacity or even worse yet leave the market entirely due to changing conditions.”

Orion180, Kin and SURE have another thing in common: All three have an “A” rating from Demotech, a company that rates insurance firms. All three have not pursued ratings from the industry’s most respected rating agency, AM Best.

Demotech’s ratings are viewed much more skeptically by brokers and insurance experts because they rarely hand out anything other than an A. An A rating is meant to signal that a company is financially sound. But in Florida in 2021 and 2022 alone, seven companies that had A ratings from Demotech went insolvent.

Demotech president and co-founder Joseph Petrelli vigorously disputes that the firm’s ratings are less reliable than AM Best’s. “Our business model is to identify insurers that are unrated or under-rated by other services,” he says. As to missing those bankruptcies, he blames “tech-enabled claims litigation” for quickly swamping otherwise healthy firms.

Gregg of Orion180 says the company plans to get an AM Best rating once their business “matures and becomes more geographically diverse.” Harper, of Kin, says he’s satisfied with his A rating from Demotech. “It’s the same to the consumer,” he says. McLean counters the notion that Demotech is less trustworthy. “There is a really broad misconception that one rating agency is better than another,” he says. “AM Best’s methodology is extremely limiting for companies that write potentially exposed property.”

The low capital, the reliance on surplus notes, the high dependence on reinsurance, the lack of an AM Best rating: Heller warns that it all comes at the expense of the consumer. “I’m quite concerned about this startup, freewheeling insurance approach,” he says. “We’re not talking about video games here, or some AI tool for making images on the internet. We’re talking about protecting the single most valuable asset that most Americans own.”

The regulators in Florida and California didn’t want to answer questions about non-admitted companies in their state. A spokesperson for California’s Department of Insurance declined to make someone available for an interview, and a representative from the Florida Office of Insurance Regulation didn’t respond to multiple requests. In an email, the California spokesperson said the “Department of Insurance urges consumers to scour the marketplace before settling for a surplus lines policy or a FAIR Plan policy.”

Regulators have been busy over the past several years grappling with the ranks of uninsured homeowners growing as major admitted companies drop hundreds of thousands of homeowners and raise rates due to mounting losses. A recent study by the Insurance Information Institute, an industry-funded research group, found that 12% of American homeowners no longer had home insurance, up from 5% in 2019.

In Florida, dozens of insurance companies have limited their presence in the state and at its recent peak in December 2023, more than 1.4 million households were signed up with Citizens, the insurer of last resort. In California, hundreds of thousands of households have flocked to the FAIR Plan. Louisiana’s home insurance market is facing the same issues, especially in the southern, coastal part of the state, where policies have become so expensive that people are being forced to move. But they often have trouble selling their homes because prospective buyers don’t want to own a property that no one will cover.

By stepping in to take on some of this risk that other companies won’t shoulder, the non-admitted companies are offering a solution for all of this. Regulators might also see it as a warning.

“This is where the market is moving, and regulators need to keep an eye on these companies,” says Sen. “It’s the market telling you that this property is uninsurable,” she says, no matter how much you might love it. “In a normal world, you would question whether anyone would actually ever buy insurance from these companies given how thinly capitalized they are.”

To woo back admitted insurers, Louisiana, California and Florida have all proposed or passed new rules that favor the industry, including the ability to pass on reinsurance costs, avoid more lawsuits and cancel longtime customers. Ford, the spokesperson for Louisiana’s Department of Insurance, says he knows all these changes might seem anti-consumer, but it’s necessary if people want insurance at all. Any insurance, he reasons, is better than no insurance, which is why regulators are unlikely to ask more questions of non-admitted companies.

Unlike Florida and California, Louisiana doesn’t have an office dedicated to collecting data and overseeing the non-admitted market. Ford says he doesn’t want one. “If that’s an additional regulatory burden that they need to comply with, then it’s just less likely that they’ll want to come here,” Ford says.

Some brokers say non-admitted policies are too risky for them. In June, when Bloomberg Green spoke with Val Atienza, a Palm Beach-based insurance broker of 30 years, he said he’d never sold a non-admitted policy and he never would. “It’s just bad business,” he said. By mid-November, in the wake of back-to-back hurricanes, Atienza couldn’t find any admitted companies willing to insure one of his customers with a 1920s-era home two blocks from the water. He saw no choice but to give the customer a quote for a non-admitted insurer—and expects the homeowner will take it.

“I don’t like it, but I can’t be too picky these days,” Atienza says. “They need insurance.”