A more rational approach to the licensing of insurance agents is certainly a concept whose time has come.
The three senior financial services principals in our firm have noted with great interest that Congress is again considering the National Association of Registered Agents and Brokers Reform Act (NARAB). This legislation has been under consideration for many years as an attempt to establish a national insurance licensing clearinghouse for insurance agents that practice in multiple states. The three senior principals in our firm have more than 100 years of combined experience in the financial services industry, and they’ve concluded that as much as 5% of that total experience has been related to licensing issues involving insurance agents.
Insurance Licensing: A Quick History
Throughout the 20th century, the licensing of insurance agents has been reserved to the states, and that is still the case today. The growth of multiple state financial institutions has made the “crazy-quilt” licensing process almost impossible for national financial services firms. Our senior principal likes to characterize the problem as “whatever you want to do is probably illegal somewhere.”
Advising clients on the licensing of insurance agents across state lines has always been frustrating, and many times has been impossible. There is a constant, unfulfilled demand for insurance licensing personnel for insurers and multiple state insurance and financial services marketing organizations. Experienced insurance licensing experts can command a high compensation and are subject to constant poaching by rival organizations.
NARAB was first envisioned at a time that federal legislation had begun to break down the lines of distinction among financial services organizations. In many cases the state insurance licensing process was motivated by two factors: 1) to afford protection to local agents from incursions by out-of-state marketing organizations, and 2) to generate a source of revenue to the state insurance regulators derived from testing and licensing fees and renewals.
The state licensing process is always characterized as necessary to “protect consumers.” Yet in many ways, the insurance agent licensing process--featuring examinations that relate to obsolete products and methods of operation--has little to do with consumer protection. The entire insurance licensing process is mired in a time period when insurance agents were “captives” of giant insurers and does not reflect the way insurance is sold in the 21st century.
In most states the licensing process begins with the “appointment” of an agent by an insurer. This means that a person who wants to sell insurance products must first be affiliated with an insurance company. Thereafter, each time such an agent wants to sell a product of another insurer, she must secure an “appointment” with the new insurer. The process is expensive, time-consuming, and has virtually nothing to do with “consumer protection.” There is at least one state where the insurance regulatory process has cut the cord between the “appointments” of agents by each insurer, but the appointment process is still in place for the vast majority of states.
Today, insurance agents do business with multiple insurers and often in multiple states--a business fact that makes the licensing process an unreasonable barrier for multi-state business organizations. Moreover, in this age of expanded consumer protection, barriers to the availability of flexible insurance products are not in the best interests of consumers. In recent years, consumer-protection activities directed toward the sale of insurance and other financial services products have aimed to provide “suitable” products and advice to consumers. It is virtually impossible to achieve such suitability goals if the financial services professionals are artificially limited in the products they can offer to their clients by an obsolete regulatory process.
As it was originally envisioned, NARAB was meant to facilitate the entry of banking institutions and similar organizations into the sale of insurance products. Many states traditionally prohibited such institutions or their employees from possessing insurance licenses, or even from the sale of insurance products on bank premises or in any way under bank auspices. Again, the motivation for these prohibitions was ostensibly to protect consumers from predatory practices linked to banking services. In effect, these prohibitions were motivated more by the desire to protect the insurance agent constituents of elected insurance regulators than for the protection of consumers.
The National Association of Insurance Commissioners (NAIC) is an organization of state insurance regulators formed to provide some consistency in the insurance regulatory process throughout the country and across state lines. Despite the frequent attempts of the NAIC to resolve multi-state licensing issues, the process has not been effective. Thus, Congress has, for many years, attempted to resolve the issue through legislation that would impose a form of nationwide insurance agent licensing to facilitate the expansion of insurance services and products across the country.
The congressional committees charged with implementing the NARAB licensing process have already begun hearings in this latest round of NARAB discussions. There seems to be a greater unanimity among insurers and other providers of insurance products than has been the case in the past. Trade associations from various sectors of the financial services industry have testified on the issue or will soon do so.
The primary pushback against NARAB seems to be from state insurance regulators themselves or from insurance agent organizations that desire to limit competition. State insurance regulators logically want to protect their turf from incursions by national regulatory bodies in much the same manner that state insurance regulators have often been hostile to the Securities and Exchange Commission and FINRA with respect to variable annuities and variable life insurance. After all, regulators like to regulate--otherwise there is no justification for their existence.
Likewise, insurance agents surely cannot accept incursions by giant banks into the business of selling insurance. Banks have facilities on street corners across the nation and, in the view of many insurance agents, thereby possess an unfair competitive advantage. Everyone needs a banking relationship to survive in our complex world. The same cannot be said about the need for a relationship with an insurance agent.
It is impossible to determine what the future is for NARAB. The concept has been around for many years and each time it surfaces again, there is optimism that this time it will become reality. Politics are always unpredictable, particularly in these unsettled economic times. Nevertheless, a more rational approach to the licensing of insurance agents is certainly a concept whose time has come. It is, in our opinion, not a question of whether insurance agent licensing will take place, but merely a matter of when and what form it will take. After all, lawyers like to be able to provide positive advice to their clients, and when 5% of a practice results in confusing outcomes, it is not a desirable situation.
Consistency is vital to a viable business--any type of business--and insurance agent licensing is among the most inconsistent factors on the national financial services scene.