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Wonderland

You must be as mad as a Mad Hatter to venture into the fantasyland of U.S. insurance regulation.

By  Coletta Kemper

In Lewis Carroll’s story Alice’s Adventures in Wonderland, Alice falls down a rabbit hole into a fantasy world populated by peculiar creatures and strange rules.

Anyone entering the U.S. insurance regulatory system for the first time must feel a lot like Alice did when she fell into that rabbit hole. It doesn’t quite make sense, there is no one set of rules, and some think it is populated by “peculiar” creatures.

Unlike in many other countries, the business of insurance in the U.S. is not regulated at the federal level. It is regulated by the states, each with its own twist on regulating insurers, brokers and others engaging in the “business of insurance.” That’s 50 states plus the District of Columbia, Puerto Rico, the Virgin Islands, Guam, and the Northern Mariana Islands with different rules.

The system works just fine if you operate in a single state, which some do, but it is a regulatory labyrinth if you operate across state borders, which all Council members do.

Over the years, The Council and others in the industry have lobbied for a more uniform system. Those efforts have met strong resistance from smaller agents. While the majority of state regulators support greater uniformity, they have made little progress in that direction, and what progress they have made probably wouldn’t have happened without the threat of federal regulation hanging over regulators’ heads.

That’s as true today as it was 10 years ago when Congress passed the Gramm-Leach-Bliley Act, which included a Council-sponsored provision designed to compel the states to enact licensing reforms. These provisions mandated that states put in place a more uniform agent/broker licensing system or face federal regulation.

After the legislation passed, the National Association of Insurance Commissioners developed the “Producer Licensing Model Act,” which was intended to bring more uniformity to the agent/broker licensing system. To date, 48 states have adopted some parts of the model with the notable exceptions of California and Florida.

While adoption of the NAIC model has made it easier for producers to get licensed across state lines, it hasn’t eliminated the differences among the states. A glaring example is that some states require the business entity to be licensed, while other states do not.

For you newcomers and for some of our international readers, here are a few insights into how agents and brokers are regulated in the U.S.

  • Licensing of agents and brokers differs in a major way from many other nations. In the U.S., we license individuals. Many states also require the business entity to be licensed, but the primary focus of regulation is on the individual agent and broker. That’s not to say the business entity doesn’t have responsibilities for its producers, but the individual is responsible for obtaining and maintaining the license.
  • Most states have adopted the NAIC model’s activity-based definition of producing as “sell, solicit and negotiating.” This approach ensures that anyone involved in those activities is licensed, regardless of whether they work for a bank, an insurer or an insurance agency.
  • Some states have adopted the model’s generic term “producer” for agent or broker and defines it as any business or person who sells, solicits or negotiates insurance in the state. This term doesn’t eliminate the legal differences between an agent and a broker, and most states still require agents to be appointed by an insurance company.
  • To become a producer, an individual must be licensed in one state as a resident. The person does not have to be a U.S. citizen but does have to show proof of eligibility to work in the U.S. (green card or visa). To obtain a resident license, states require pre-licensing education courses and passage of an exam. Some states exempt individuals from courses and/or the exam if they have a professional insurance designation or a college degree in insurance. States also require the producer to take continuing education courses to maintain the license.
  • Most states require background checks, and some states require the submission of fingerprints. Convicted felons generally can’t get licensed unless they obtain a special waiver from the state insurance regulator.
  • Individuals licensed and in good standing in their home state can apply for a non-resident license in other states. Many, but not all, states have adopted reciprocity, which means the state will accept the licensing qualifications of a producer’s resident state for the purposes of non-resident licensing.
  • The license renewal process varies by state. For example, some states use the birth month for license renewals, some set a date, and some use the date the original license was issued.

Confused yet?

Welcome to America’s rabbit hole.

Kemper is The Council’s vice president of Industry Affairs.


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