Insurance Agent Licensing: Overview and Background

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Insurance Agent Licensing: Overview and Background
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  • The insurance industry got off relatively well during the COVID-19 crisis according to the Allianz Global Insurance Report.
  • Property insurance in particular stood out- recording a small increase of roughly 1.1%,
  • The insurance industry is expected to see strong growth in 2021, with premiums rising by 5.1% globally.

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Insurance agents indubitably hold a vital role in our society, as they are in charge of ensuring that the general public is provided with adequate insurance coverage in relation to their health, homes, and property. As premiums keep soaring, so do certain stocks that benefit from this trend.

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As a prolific number of people rely on the legal protections that are offered via insurance- and trust their insurance agents (or brokers) to recommend comprehensive and appropriate insurance coverage, it makes sense that every U.S. state requires its agents to attain an insurance license before they are allowed to sell insurance to their clients.

As we will further explore below, the specific requirements for such licensing can vary greatly depending on the state in question, as well as depending on the type of insurance that is sold- known as the "line of authority". Most states also hold different exams depending on an applicant's residency status, so applicants will need to know beforehand whether they are planning to work in a state other than the one that they are currently residing in or vice versa.

Generally speaking, most states require applicants to: a) complete a pre-licensing training course, b) pass a state-sanctioned exam, and c) submit to fingerprinting.

Lines of Authority

As briefly touched on above, all insurance agents must be licensed for each specific line of authority that they want to work with. This means that insurance brokers that want to sell more than one type of insurance will need to be licensed more than one time. This structure has actually been the recipient of prolific criticism given that it tends to significantly increase aspiring agents’ entry fees- a fact that is further explored below.

The most ‘’common’’ lines of authority include:

  • Life insurance. This includes both whole and term life insurance
  • Property insurance- both in relation to homeowners and renters insurance
  • Casualty insurance- focusing primarily on losses incurred as a result of being personally liable for other persons’ injuries.

Some states allow individuals to purchase ‘’bundle options’’ where they get licensed in more than one line of authority at the same time- rather than complete one individually, and then have to return to do another one later one.

A Legal Overview

Individual states have had power over their primary insurance legislation for over 150 years. In fact, congress specifically authorized this in the 1945 McCarran-Ferguson Act. More recently, state primacy in relation to insurance licensing regulation has been recognised through fundamental acts which have indubitably played a vital role in the reshaping of our financial regulatory system.

These include the 1999 Gramm-Leach-Bliley Act and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

This system of ‘’multiple state regulators’’ however, has faced severe criticism over the last couple of decades or so. This is because it has been categorized as ‘’heavily burdensome and inefficient’’ by insurance licensing agents, who have identified the legal requirement to have multiple licenses for different lines of authority as a significant expense in their starting operations.

There have been attempts to ‘address’ these concerns, both by the National Association of Insurance Commissioners (NAIC), and by the National Conference of Insurance Legislators (NCOIL), who have tried to holistically harmonize the legal rigmarole of the industry by introducing new model laws in an insurance licensing context.

To be legally binding, however, any model laws suggested by either the NCOIL or by the NAIC have to be adopted at state level; states (as a result of their aforementioned sovereignty in this area of insurance law) have the absolute right to incorporate such amendments into their judicial systems, or to simply completely reject them, and any step in between.

This has given rise to a plethora of federal proposals that are meant to significantly alter the structure of the current state-based regulatory system- including introducing a broad charter at a federal level that is meant to entirely replace the one that is currently in place.

Insurance Producer Licensing

As we have seen, the licensing mandates that persist for insurance agents have been a fundamental part of our insurance system’s regulatory procedures for quite some time now.

These license procedures are meant to provide a legal mechanism whereby insurance regulators can efficaciously enforce certain standards of conduct- especially in relation to consumer protections. They can also provide a significant revenue source at a state or government level, which can help ‘’defray’’ the total cost of the insurance regulatory system as a whole.

Essential elements of an insurance license procedure include industry-related knowledge requirements, as well as specific education (such as criminal background checks, passing a written examination prior to licensing, and continuing with your insurance education afterwards if you want to ‘’maintain’’ your license).

The aforementioned Gramm-Leach-Bliley Act attempted to address a variety of the issues discussed above- including the multiplicity of varying requirements among different U.S states for insurance agent licensing.

Even though the majority of U.S states satisfy the act’s regulatory requirements for reciprocity, insurance providers in the U.S have continued to identify prolific inadequacies and inefficiencies with the state-led licensing system, calling for the introduction of legislation that addresses them.

In 2008, insurance agent representatives before the House subcommittee suggested that such a system continues to ‘’impose additional conditions’’ and requirements- particularly for non-resident agents, despite the reciprocity that is mandated in law.

In 2009, the Government Accountability Office (GAO) issued similar complaints, discussing how the varying requirements in relation to fingerprinting and background checks has inadvertently created uneven consumer protection in the states where such background checks were not being regularly performed.

Conclusion

Just like every other career path, deciding to become a fully licensed insurance agent can be the beginning of a very exciting and self-fulfilling journey.

Even so, before starting out it is highly recommended that you ensure that you thoroughly understand the licensing procedures involved- both in your state and in any other states that you may wish to work in in the future.

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