Insurance licensing is a complex legal quagmire in the United States. Before 1850, insurance companies operated with very little formal regulation. However, as these companies proliferated, it became obvious that there was a strong need for formalized regulations. Before then, these companies acted with impunity, often creating chaos and a negative consumer experience.
A Supreme Court decision in 1869 determined that insurance was not subject to federal control. However, this was reversed in 1944. Then, in 1945, Congress placed the power to regulate insurance in the hands of individual states. It also left some regulatory authority to the federal government, but the lion’s share of control rested (and continues to rest) with the states.
As a result, state insurance departments were created. These insurance departments are overseen by insurance commissioners (although this title is not the same in every state.) The insurance commissioner is either appointed or elected, according to that state’s laws. The insurance commissioner is the chief of the state insurance department.
The insurance commissioner is charged with the enforcement of state insurance laws, including monitoring the operations and solvency of each insurance company in that state. These departments must also keep track of how each company is organized, operated, managed, and controlled. The commissioner is the person who determines whether a given insurance company can do business in that state. Companies permitted to do business in a given state are granted status as admitted companies. Non-admitted companies have limited operational authority in a state. They are not regulated as heavily, but they must register and will not be covered by any state guaranty funds.
State insurance laws are intended to ensure that the public receives fair treatment in insurance matters. They protect consumers from fraudulent activity on the part of insurance companies.
In order to sell insurance in a given state, an individual must (in most cases) prove to have adequate knowledge of the product being sold. They must also meet all state licensing requirements. Insurance licenses protect consumers, prove qualifications, and state an agent’s authorization to sell insurance products. In most states, individuals cannot sell insurance without being licensed. Appointments may also be required by many states, which will be explained later in this chapter.
An insurance license is required for anyone who wishes to:
• Sell insurance: exchange a contract of insurance by any means, for money or an equivalent, on behalf of an insurance company
• Negotiate: offer advice to someone planning to buy an insurance contract regarding benefits, terms or conditions (if the person engaged in this negotiation sells insurance or obtains insurance from insurers for purchasers.)
• Solicit: attempt to sell insurance or ask someone to apply for insurance of a particular sort from a particular company
Those who attempt to sell, negotiate, or solicit insurance without a license are typically subject to harsh penalties, including fines, disciplinary action and, rarely, imprisonment. In some cases, both the individual and the company for whom that individual was selling products without being properly licensed will be penalized.
When a state legislature passes a new insurance law or regulation, rules and procedures are also enacted to aid the insurance commissioner in enforcing those laws. Insurance laws do not change much. On the other hand, rules and procedures change frequently. This is because of changes in personnel (insurance commissioners), insurance department budgets, technology, and industry trends, among other factors.
Insurance departments are the bodies charged with recommending laws to state legislators, approving insurance rates, approving policy forms and overseeing insurance marketing practices. They are also charged with protecting consumers.
In most states, the assistant to the insurance commissioner is known as the deputy commissioner. The insurance department is usually organized into divisions. Those divisions may include: policy, form and rate filings; annual statements; legal counsel; consumer inquiries and complaints; company licensing; deposits; premium tax; and producer licensing.
The NAIC and PMLA: Bringing Some Organization to the Chaos
The NAIC is the National Association of Insurance Commissioners. Insurance commissioners from the 50 states, the District of Columbia and five U.S. territories belong to the NAIC. It was founded in 1871 and its goal is to help commissioners develop uniform policies when this is possible and logical.
The NAIC establishes and recommends model laws. Committees suggest any changes or additions to these laws. The suggestions are then voted on by the executive committee and members of NAIC. Although the NAIC does not require states to adopt the model laws, many do. This ensures some standardization as far as rules and procedures in the insurance business.
One important federal law to be aware of is the Gramm-Leach-Bliley Act (GBLA), which was passed in 1999. This law primarily affected the banking industry, but a portion of it required state insurance departments to standardize their licensing requirements. Based on this law, NAIC developed the Producer Licensing Model Act (PLMA.) This model gives definitions of producers, their duties, and license and appointment requirements. Most states have adopted the PMLA, either wholly or partially. The requirements that we explain here are based on the PMLA.
One of the groups, or task forces, within the NAIC is the Producer Licensing Working Group, or PLWG. The PLWG is focused on the goal of streamlining and providing uniformity to the insurance producer licensing process.
The National Insurance Producer Registry (or NIPR) is a nonprofit affiliate of the NAIC, created in 1996 to help the states and the NAIC restructure, simplify and standardize the producer licensing process.
One program the NIPR has developed is known as the State Producer Licensing Database (SPLD.) It is used by regulators to connect state insurance departments with the entities being regulated (title insurance companies.) This way, applicants and licensees can submit applications, appointments, terminations, address changes and other important information to regulators in multiple states directly through the online system developed by NIPR. They can also use authorized third party providers who have access to the NIPR system.
Although great strides have been made in the direction of uniformity when it comes to insurance licensing, there is still a different process in each state when it comes to becoming licensed as insurance producers. This is particularly true with “special” lines like title insurance. The intention of this handbook is to guide those interested in becoming licensed as an agent or agency in navigating each state’s rules and regulations.