Originally, an insurer could be formed only by a special act of the legislature. When this proved to be a burdensome and unwieldy procedure, states passed general incorporation laws under which charters could be obtained directly from a state official. Although technically incorporation confers legal existence on the insurer, by itself it does not grant the company the authority to engage in the insurance business. Generally, all insurers doing business within the state must obtain a license (called a certificate of authority in some states), which is a formal document certifying that the company has complied with all applicable laws and is authorized to engage in the kinds of insurance specified. When issued to a domestic insurer, the license usually does not need to be renewed periodically. However, in some states, it can be revoked for cause.

In addition, an insurer must obtain a license from every other state in which it wants to do business. The requirements for licensing foreign (out of state) and alien (out of country) insurers are generally similar to the requirements for domestic insurers. However, a foreign or alien company is usually required to appoint a resident of the licensing state as its attorney, for service of legal process and to deposit a specified amount of securities with a designated state official to assure payment of claims to policyowners residing in that state. A license obtained from a nondomiciliary state usually must be renewed annually.

The insurance commissioner, for sufficient reason, can refuse to issue a license in the first instance, fail to renew a license that has expired, or revoke a license before its normal expiration date. The grounds for such actions may differ in statutory language between states, but they are quite similar in substance. The commissioner may be authorized to deprive a company of the privilege of doing insurance business in the state on such broad grounds as that it "is in the public interest" or "will best promote the interest of the people of the state."

Without the license it is illegal for an insurer to do business in the state. In order to obtain and retain the license, the insurer must comply with the regulatory conditions imposed. Thus the licensing power is the foundation of regulatory control.

As the foundation of regulatory control, the power to license is not without problems. Insurers that only advertise, have a mail-order business, or conduct only sporadic activities in a state have maintained that they are not legally "doing business" in the state and are therefore beyond the scope of that state�s control. By refusing to apply for a license, these unauthorized (unlicensed) insurers seek to avoid regulation in states other than their states of domicile. However, state regulators have not been without legislative response.

Following an effort to regulate misrepresentative advertising of unauthorized mail-order insurers, the NAIC adopted the Unauthorized Insurers Model Act in 1968 to subject unauthorized insurers to the jurisdiction of the insurance commissioner and the courts of the enacting state. (Subsequently, 27 states enacted the model act [or something similar], and 10 other states adopted related legislation or regulation.) The act seeks to afford those in the state the benefits of the protection provided by regulatory safeguards, prevent unfair competitive advantage between unauthorized and authorized insurers (the latter being subject to regulatory constraints and mandates), and preserve premium tax revenue. The act states that it is illegal for any insurer (other than specified exceptions) to transact insurance business in the state without a license. Any specified act effected by mail or otherwise by or on behalf of an unauthorized insurer is deemed to constitute such transaction. These acts include proposing to make an insurance contract, taking an application for insurance, receiving or collecting premiums, issuing or delivering contracts of insurance to residents of the state or to persons authorized to do business in the state, soliciting insurance, and adjusting claims. Through the courts, the insurance commissioner may seek to enjoin such illegal activity.

Two basic constitutional questions arise when a state exerts its regulatory authority over unauthorized insurers. First, does a state exceed the constitutional bounds of due process when it attempts to assert jurisdiction over such insurers? Although the answer to this question depends on the circumstances of each situation, when the United States Supreme Court let a Wisconsin Supreme Court decision stand that upheld the insurance commissioner�s authority to apply that state�s unauthorized insurers law against mail-order insurers, it appears that as a general proposition, due process does not preclude the exercise of state regulatory authority against unauthorized insurers. Second, can a state effectively enforce its decisions against out-of-state insurers? The Unauthorized Insurers Model Act contains a reciprocal enforcement provision. The courts of each state enacting this provision will enforce judicial determinations of the courts of the reciprocal states having a similar provision as if they were judicial decrees of the enacting state.

Unfettered activity by unauthorized insurers can seriously undermine a state�s ability to regulate the insurance business. Although state regulatory response has not been fully effective, techniques have been implemented adequately enough, at least to date, to provide acceptable control.

No element of the insurance business deals more closely with the insurance-consuming public than agents and brokers (the focus here is on agents). Consequently, no person may act as agent for an insurer within the state without first obtaining a license to do so. No insurer may issue a contract of insurance through or compensate any person (other than certain deferred compensations, such as renewal commissions) who acts as an agent unless that person has a currently valid license. A license once granted may be revoked for good cause. Since an agent�s livelihood depends on being licensed and since obtaining and maintaining a license are conditioned on compliance with the insurance law and regulations, the state�s licensing power is the foundation of regulatory control over agents.

Regulation of agents exists to protect the insurance-consuming public from harmful acts or omissions. Licensing requirements attempt to screen out incompetent or unscrupulous agents or subsequently remove those who slip through the initial screening from the marketplace.

In 1973 the NAIC adopted an Agents and Brokers Model Licensing Act (which has been frequently amended). Although all states have agent licensing laws, only a few states have enacted the model act per se. Nevertheless, the act pulls together licensing features commonly used throughout the country.

Pursuant to the model act, an insurance agent (an individual, partnership or corporation appointed by an insurer) is one who solicits applications and/or negotiates for a policy of insurance on behalf of an insurer. Although a partnership or corporation may be licensed as an agent, the members of the partnership and the officers, directors, stockholders, and employees of the corporation licensed as an insurance agent must also qualify as individual licensees. Typically, the provisions of agent-licensing laws apply to all or virtually all lines of insurance and types of insurers. The review and approval of an applicant�s qualifications are conducted within the context of the particular license for which the application is sought (that is, an examination for a life insurance license covers life insurance). To obtain a license the proposed licensee submits an application to the insurance department providing information about his or her character, experience, and general competence. The commissioner must deem the applicant to be competent, trustworthy, and financially responsible, and to have good personal and business reputations. Each insurer for which the applicant is to be licensed submits a notice of appointment along with some kind of statement or certification of trustworthiness and competence by a responsible officer of the insurer.

To assure a certain minimum level of competence in the line of insurance for which the applicant is seeking a license, the applicant must usually pass a written examination testing his or her knowledge of the lines of insurance to be handled under the license, the duties and responsibilities of the licensee, and the pertinent insurance laws of the state. As an alternative, in some states, the commissioner may be authorized to accept the applicant�s successful completion of an approved course of learning (for example, completion of the Chartered Life Underwriter program).

Power to Refuse, Deny, or Revoke. The NAIC model act provides for annual renewal of agent and broker licenses. Commonly, however, a state will issue an agent�s license that continues indefinitely (contingent on the payment of annual fees) until the licensee dies, the insurer�s appointment is terminated, or the license is suspended or revoked by the insurance commissioner. The commissioner can refuse to issue a new license and revoke or suspend an existing license on various grounds, such as material untrue statements in the license application, violation of or noncompliance with the state�s insurance laws or regulations, fraudulent or dishonest practices, and demonstration of untrustworthiness, incompetence, or financial irresponsibility.

Continuing Education Requirements. Consumer confidence in the insurance industry depends on the demonstrated knowledge, experience, and professionalism of the insurance agent with whom the customer chooses to do business. In response to the rapidly changing life insurance marketplace, continuing education for life insurance agents has been increasingly accepted as an important way to ensure that agents acquire, retain, improve, and update the knowledge and skills essential to advising and serving life insurance buyers.

In 1978 the NAIC adopted the Agents Continuing Education Model Regulation. Licensed agents must annually complete courses or programs of instruction (such as the Chartered Life Underwriters program of The American College) approved by the commissioner and provide the commissioner with written certification that he or she has done so. Failure to do so subjects the agent to license suspension. Although the required credit hours and the course content can vary significantly by state, by the end of 1992, approximately 80 percent of the states conditioned the retention of the agent�s license to do business upon earning continuing education credits.