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Legal Ease by Scott Sinder Failed Promises

The NAIC’s failure to deliver on uniform licensing may be violating federal law.

By  Scott Sinder and John Fielding

The Edsel was introduced 50 years ago. Prior to its debut, the famous Ford flop was probably the most over-hyped, over-marketed, over-anticipated product since, well, ever. The Edsel never lived up to its promise and was discontinued after a couple of years. We have had other over-hyped flops in the past half-century: Nixon’s “secret plan” to end the Vietnam War; New Coke; Hillary Clinton’s (original) health care plan; “shock and awe”; Howard Dean’s presidential bid; Britney’s recent “comeback”; and, for the last decade, the former Super Bowl champion Redskins.

The NAIC has had its share of flops, as well. Some consider the regulators’ failure to live up to the promise made by its first president in 1871 to achieve full uniformity in state insurance regulation as the organization’s biggest failure. But that was a long time ago. This year, NAIC President and Alabama Commissioner Walter Bell has been promising progress in producer licensing reform.

We are not comparing the NAIC’s producer licensing reform process to the Edsel or, heaven forbid, Hillary’s health care plan. But it is important that promises made be kept—especially in an area such as producer licensing, where the regulators have the authority and the influence within their states to make the changes necessary to reform the system.

Bell has made a big deal of this producer licensing effort, and the NAIC’s Vice President Roger Sevigny of New Hampshire has taken on the day-to-day task of moving the project along. It is high-profile and will have to live up to its hype if the NAIC wants to retain its credibility as an organization that can bring insurance regulation into the 21st century.

To their credit, the regulators are trying. Sevigny has established a coalition of regulators and producer representatives, including The Council, to work on the issue. Although called a “coalition,” the group is NAIC sponsored and led, and the regulators hold the cards in terms of the ultimate ability to make the necessary changes in their states. The industry members serve more of an advisory role. Still, there appears to be a real desire on the part of regulators in the coalition to understand the problems and take action to resolve them.

The group has met three times. Prior to the group’s last meeting in Washington, The Council drafted a letter to all the coalition members detailing the problems faced by producers in obtaining state licenses. The National Association of Insurance and Financial Advisors and the National Association of Professional Insurance Agents signed onto The Council’s letter; the Independent Insurance Agents and Brokers refused.

The letter included a state-by-state rundown of the “extra” requirements that cause producer licensing to remain a cumbersome and burdensome process. There is also a potential legal issue because the states could be in violation of the NARAB provisions of the Gramm-Leach-Bliley Act (GLBA). We continue to study this issue.

In discussions with the coalition, The Council has emphasized two areas that need attention: reciprocity and uniformity. Nearly a decade after GLBA passed, the states still have not succeeded in enacting reciprocal rules and regulations for non-resident producers. This is a major problem in states that have made no attempt at being “reciprocal” (such as mega-markets California and Florida) as well as in states that the NAIC has certified as being reciprocal. A number of these states have requirements that effectively nullify the advantages gained by reciprocal treatment.

Although we have provided the NAIC with a list of specific states and problems, there remains a lack of information as to what actually is happening out there. We would like to get feedback from Council members on what you find when you attempt to obtain state licenses. What requirements cause the most difficulties, delays and expense? Any additional information we can provide to the regulators will be helpful to define the parameters of the problem—and illustrate the seriousness of the issue. The regulators have welcomed our information and have agreed to look closely at the actual practices in each state to see if they are complying with the spirit as well as the words of the reciprocity requirements. They hope to have this audit complete by February.

Commissioners participating in the coalition have also agreed to address agency licensure. They are going to ensure states are not requiring state Secretary of State registration as a precondition for a non-resident, a requirement in well over a dozen states. This delays licensure and, we believe, violates GLBA. Regulators have agreed to work with the secretaries of state to determine if the registration requirement can be dropped for non-resident agents. This makes sense since producers are already subject to oversight by insurance regulators.

Finally, the commissioners have agreed to raise the issue of whether entities should be licensed at all. This is a long shot, and there may even be disagreement within the industry, but we’re glad that regulators are at least willing to discuss it.

So there is some hope that regulators are attempting to back up their promise to reform the producer licensing system with concrete actions. Until we see results, however, it’s all hype.

Sinder is CIAB general counsel.
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Fielding is of counsel at Steptoe & Johnson. jfielding@steptoe.com

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