No element of the insurance business deals more closely with the insurance-consuming public than insurance agents and brokers. Thus any viable system of public protection cannot ignore appropriate safeguards with respect to agent and broker conduct. Regulation of agents exists to protect the insurance-consuming public from harmful acts or omissions, whether attributable to their incompetence or unscrupulousness. Licensing requirements seek to screen incompetent and/or unscrupulous agents out of the marketplace in the first instance and remove those who slip through the initial screening in the second instance.

Consequently no person may act as agent or broker within a state without first obtaining a license to do so. And no insurer may issue a contract of insurance through or compensate any person (other than certain deferred compensation such as renewal commissions) who acts as an agent unless such person possesses a currently valid license. Engaging in the insurance business without a license subjects the agent or broker to possible prosecution and fine. Since an agent’s or broker’s livelihood depends upon being licensed and since the obtaining and continuing of a license is conditioned upon compliance with the insurance law and regulations, the state’s licensing power constitutes the foundation of regulatory control over agents and brokers.

The conduct of insurance agents has been found to be an appropriate subject of legislative control by the states without violating provisions of the Fourteenth Amendment or the Commerce Clause of the United States Constitution. A state may forbid any person acting as an agent for any insurance company without having first obtained a license to do so. A license, once granted, may be revoked for good cause. A state may prohibit the soliciting of insurance or otherwise acting as an agent for a foreign or alien insurer not authorized to do business in the state.

In 1973 the NAIC adopted an Agents and Brokers Model Licensing Act (which has been amended several times since then). Although all states have laws in the area of licensing agents and brokers and some states do so with respect to analysts or consultants, only a few states use the Model Act. The other jurisdictions typically apply laws enacted prior to the model. Nevertheless, for discussion purposes, the Model Act pulls together and highlights licensing features in common use throughout the country. Although the licensing laws may vary from state to state, there is substantial commonality in approach.

Pursuant to the Model Act, a partnership or corporation may be licensed as an agent or broker. However, members of a partnership and officers, directors, stockholders and employees of a corporation licensed as an insurance agent or broker must also qualify as individual licensees if they are to engage in soliciting or negotiating policies.

An insurance agent is an individual, partnership or corporation appointed by an insurer who solicits applications and/or negotiates for a policy of insurance on behalf of an insurer. An insurance broker is one who, for compensation, acts or aids in negotiating contracts of insurance or placing risks for someone other than the broker but who does not represent the insurer. A consultant is an individual, partnership or corporation who, for a fee, engages in the business of offering advice, or service as to the advantages or disadvantages promised under a policy of insurance.

Typically, the provisions of the agents and brokers licensing law apply to all or virtually all lines of insurance and types of insurers including life, health, property, liability, credit, title, fire and marine. Furthermore, licensing laws apply to companies operating on a stock, mutual, reciprocal, and fraternal basis. Of course, the review and assurance of an applicant’s qualifications are conducted within the context of the particular license sought (for example, an examination for a life insurance license covers life insurance).

Although there are some variations between the requirements for an agent’s and a broker’s license with the requirements for the broker tending to be somewhat more stringent, nevertheless, the requirements are substantially similar for both.

The procedure to be followed in obtaining a license is similar for all lines. The proposed licensee submits an application to the insurance department providing information as to his or her character, experience and general competence. To obtain a license, the applicant must be deemed by the commissioner to be competent, trustworthy, financially responsible and of good personal and business reputation. Each insurer for which the applicant is to be licensed must submit a notice of appointment along with some kind of statement or certification of trustworthiness and competence by a responsible officer of the insurer. In short, engaging in the business of insurance as an insurance agent involves the two-step process, that is, the agent must be licensed by the state and must be granted authority by an insurer to represent that insurer. In contrast, a broker needs only to be licensed by the state.

To assure a certain minimum level of competence in the line of insurance for which the applicant is seeking a license, commonly an applicant is required to pass a written examination testing the applicant’s knowledge as to the lines of insurance to be handled under the required license. Also the examination covers the duties and responsibilities of the licensee and the pertinent insurance laws of the state. The examination is given under the auspices of the insurance department. The commissioner may be authorized to waive a portion of the written examination requirements if a nonresident applicant already holds a valid license in his or her home state or if the individual has successfully completed an approved course of learning (for example, earned the Chartered Life Under- writer designation). However, such individuals would still be required to successfully complete that portion of the examination that pertains to that particular state’s rules, regulations and insurance law.

When issued, the license shall state the name, address and social security number of the licensee, the issue and renewal dates of the license, the lines of insurance covered by the license, and the name(s) of the appointing insurer(s).

The NAIC Agents and Brokers Model Licensing Act provides for annual renewal of agent and broker licenses. Commonly, however, a state will issue an agent’s license which continues indefinitely (contingent upon the payment of annual fees) until the licensee dies, the insurer appointment is terminated or the license is suspended or revoked by the insurance commissioner. Furthermore, as discussed below, continuation of an agent’s license may be conditioned upon meeting mandatory continuing education requirements. Commonly a broker’s license must be renewed annually.

The grounds upon which the insurance commissioner can refuse to issue a new license and revoke or suspend an existing license are varied and numerous including material untrue statements in the license application, violation of or noncompliance with the insurance law or regulation, fraudulent or dishonest practices, demonstration of untrustworthiness or incompetence, and financial irresponsibility.

Consumer confidence in the insurance industry is founded upon, among other things, demonstrated knowledge, experience and professionalism of the insurance agent with whom the customer chooses to do business. Recognizing the complexity of the insurance business and the rapidly changing life insurance marketplace, mandatory education for life insurance agents has been increasingly accepted as an important element in assuring that agents stay abreast of industry developments. Quality service

The imposition of mandatory education requirements, both prelicensing and post-licensing, seeks to assure that agents acquire, retain, improve and update the knowledge and skills essential to advising and serving insurance buyers.

Prelicensing Education. As late as 1970, most states required only minimal training and preparation to obtain a life insurance agent license. Although a study manual may have been available to applicants, it was estimated that it took less than a week for an applicant to study for successfully taking the licensing examination. However, in the context of changing economic times, the introduction of increasingly complex products and the growing competition not only between insurers themselves but also with other financial institutions, both insurance companies, agent associations and regulators came to realize that better trained agents function better in the new marketplace. With this shift in attitude, mandatory education requirements as a prerequisite to obtaining a license garnered widespread acceptance.

Although the standards for obtaining a life insurance agent’s license vary from state to state, uniform criteria include trustworthiness and competency of the applicant and appointment of the applicant by a life insurer. The obvious method for determining competence is a meaningful and comprehensive written examination. After a long period of resistance, every state now requires a written examination for a life insurance agent license. During the mid-1970s, several individual states began using a uniform examination procedure, the Multi-State Insurance Licensing Program (MILP), under the sponsorship of the NAIC and administered by a division of the Educational Testing Service. Similarly several states came to utilize examination questions developed by the Insurance Center at Drake University. In addition to strengthening the examinations themselves, states began requiring mandatory formal classroom hours or some other prelicensing course work. In the early 1980s, the NAIC encouraged all states to enact enabling legislation and to promulgate regulations establishing mandatory prelicensing education criteria for agent-license applicants.

The prelicense requirements came to generally 40 hours of classroom work or its equivalent gained from an approved correspondence course. Courses and programs are usually "as approved by the commissioner" and may include those of sponsoring insurers, recognized state or national agent organizations, and college or vocational school courses conforming to a state-designed model insurance curriculum. Such courses may be monitored by the insurance department as to both hours and content. Certification of successful completion may be made by either a sponsor or the individual applicant or both. An educational affidavit is submitted by each examinee at the time of the examination.

Mandated Continuing Education. Although Maryland enacted the first mandatory prelicense education requirement in 1963, a decade elapsed before the modern age of prelicensing and continuing (post license) mandatory education requirements were ushered in during the 1970s. This was a period of the advent of the financial services industry, increasing sophistication of products, and increasing sophistication of consumers buying those products. The traditional bread-and-butter whole life insurance policies were coming under greater scrutiny in the context of increasing competition from other players in the financial services marketplace. The insurance sales force became subject to criticism for being inadequately prepared to explain more complex products and competing products, while at the same time the consumers were becoming more sophisticated in what they were seeking and buying. Meanwhile the state insurance regulators were confronted by increasing complaints about incompetent agents. And insurer sales departments needed to enhance their agents’ knowledge on a continuing basis relating to the changing environment. Consequently a variety of groups contributed to the emergence of mandatory education requirements including insurers, state regulators, consumer activists representing the lay public and insurance agents represented by their local, state and national associations. Insurance agent associations entered into the discussion because of their concerns as to the worsening image of agents in the minds of prospective insurance buyers. As a result, support for mandatory continuing education expanded into support for mandatory prelicensing education as well, on the basis that it was just as important to educate and qualify prospective agents before they entered into the field as it was to keep agents informed of changes after they became licensed. This confluence of interests of various groups in improved agents’ education heralded the development and implementation of both prelicensing and postlicensing mandated education requirements to (1) improve agent’s competency and (2) "wash out the marginal or unqualified agents."

Reflecting these developments, in 1978 the NAIC adopted the Agents Continuing Education Model Regulation to establish requirements and standards for continuing education programs for persons licensed to solicit or sell insurance. Under the Model Regulation licensed agents must, on an annual basis, satisfactorily complete courses or programs of instruction as may be approved by the commissioner (such as the Chartered Life Underwriter program of The American College) and provide to the commissioner written certification that he or she has done so. The Model Regulation would require 25 classroom hours of instruction during the first 4 years following the issuance of the license. Thereafter 15 classroom hours are required. Failure to comply subjects the agent to license suspension.

By early 1994, 45 jurisdictions either had or were in the process of implementing continuing education requirements which conditioned the retention of the agent’s license to do business upon earning continuing education credits. However, few regulations follow a pattern. Only eight states adopted the NAIC version or something similar. The credit hours and the course content required can vary significantly by state. For example, the number of credit hours required range from 6 hours annually in one state to 48 hours every 4 years in another. One supplier of a continuing education course was approved for 39 credit hours in one state, 32.5 hours in another and only 8 hours in a third. Some regulations apply to all agents and brokers, while others apply only to resident agents with reciprocity laws covering nonresident agents.

Most participants in the system (agents, insurers, regulators and consumers) accept the objective of protecting the public from incompetent and unethical acts. Continuing education programs, well designed to ensure a minimum level of competence and up-to-date knowledge so as to maintain a license, can contribute to enhanced agent and broker professionalism. At the same time, however, legislators and regulators have created a somewhat costly, uncoordinated and paper-intensive burden for the insurance producers, insurers, educators developing and presenting courses and providers in obtaining continuing education credits for courses. Furthermore, there is concern about the varying quality of courses used in different states. Consequently pressures are being brought to bear to improve the agent licensing system with respect to, among other things, the differing continuing education requirements. Alternative approaches being considered, which are noted in the following section, include an NAIC task force to examine proposals related to the development of uniform agent licensing requirements, a federally created authority to establish national licensing standards, and interstate compacts.

In short, from both insurer and agent perspectives, the wide diversity of individual state requirements has become a major problem. As each state develops its own continuing education requirements, it becomes increasingly difficult and expensive for agents writing business in multiple states to obtain and maintain their licenses. Consequently there are continuing pressures for relief. At the same time, however, it has also been urged by a spokesman for the national organization of life insurance agents that "the benefits of mandated education requirements far outweigh any impositions or inconveniences they may create."

Insurance agents and brokers have often complained about the necessity of their becoming licensed in each of the states in which they desire to do business. Each state uses its own application form, license classifications and license examinations. Continuing education requirements vary from state to state, thereby compelling agents to comply with the differing requirements in each state in which they do business. Providers of such courses must file the same course material for approval in multiple states having different procedures, fees and course requirements.

No program, model legislation, or regulation has yet been adopted to address the multiple state licensing problems as a whole. Off and on over the past decade, the NAIC has debated means to coordinate agent licensing so that obtaining a license in one state would suffice for other states which subscribe to the program. The NAIC established working groups in 1985 and again in 1989 to consider the lack of uniformity in agent licensing. But many states have been reluctant to enter into a uniform or centralized system of agents’ licensing because of concerns that (1) they would lose control over licensing decisions affecting their states, (2) state revenues would be significantly and adversely affected, and/or (3) resident agents could be subject to unfettered access to their local market by producers from out of state (that is, local protectionism).

Initially a producer database was conceived as an antifraud mechanism to assist states tracking "rogue" agents who had engaged in unethical or fraudulent practices. Such agents have demonstrated the ability to move undetected from one state to another and from one insurer to another with relative ease. All too commonly, an agent fired or forced to resign from one insurer for alleged wrongdoing is snapped up by another company that turns a blind eye to the agent’s history because he or she can produce business leading to commissions and bonuses. Agents who have lost their licenses in one state too often have been able to obtain a license in another state. Until this practice can be curbed, insurers will be unable to adequately clean up a host of market conduct problems currently confronting the life insurance industry.

The availability of and ready access to information on agents would better enable states to track those who have run afoul of the law in other jurisdictions as well as identify and track agents with a history of complaints against them. A producer database can serve as a vehicle for holding licensing, regulatory, and disciplinary information with respect to insurance producers. Such information would come not only from state insurance regulators, but also from other regulatory and investigative organizations, such as the National Association of Securities Dealers, as well as from insurers, agents and trade groups, testing services, and product vendors. Furthermore, the database can be used to automatically notify states of regulatory actions against agents, including license revocations, that occurred in other states.

Of course, information compiled and maintained in a database should be used in a judicious manner. Complaints can be made against anyone whether or not warranted. Like anyone else, agents should not be deemed guilty simply on someone’s allegations. Thus, care needs to be exercised in judging an agent solely on his or her history of complaints. Instead, adjudicated complaints (that is, complaints resulting in regulatory action with disciplinary implications) should be the focus of regulatory attention. However, a "pattern of complaints" does raise a red flag justifying further investigation as to inappropriate conduct.

The concept of the producer database has evolved beyond being simply a mechanism to track rogue agents. States are also concerned over the problems associated with an uncoordinated licensing system that adversely impacts multistate activities of agents and insurers who incur significant burdens in complying with varying multistate agent licensing requirements. A producer database is seen as a means to better cope with this problem.

In mid-1993, the NAIC as a whole again embarked upon addressing a nationwide licensing system for agents and brokers. An NAIC Producer Database Working Group was charged with the task of developing a national producer database that, in turn, could lead to more uniform and/or national agent licensing procedures as well as more uniform continuing education laws. However, two important conditions were established. First, no individual state’s licensing authority should be compromised by the process. Each state is to retain control over licensing decisions and enforcement with respect to that state. Second, the revenue generated at the state level from licensing must remain intact. The database project is part of an anticipated 5-year project leading to greater uniformity in agent licensing.

By mid-1995, the NAIC Producer Database (PDB) was installed in six pilot states. The tracking system enhances state agent licensing systems by making available producer information from other states and information from other investigative databases. States electronically transfer producer information to the NAIC central database. Other states can access this information. More specifically, the functions of the PDB include (1) tracking current and historical licensing information, (2) automatic notification of insurance regulatory actions and losses of resident licenses, (3) notice of disciplinary information, (4) tracking of NASD examinations and states of registration, and (5) an on-line bulletin board containing the various individual states’ licensing requirements and procedures. Thus, in response to pressures arising from the burdens imposed on agencies, agents, and insurers by an essentially uncoordinated multistate agent licensing system, the concept of the PDB has now been expanded beyond solely antifraud purposes.

Further possibilities include making the PDB accessible to insurance agencies and insurers, on a fee-for-service basis, to better enable them to perform background checks on potential recruits, thereby reducing costs and improving efficiency in the agent appointment process. Not only could the access to the PDB lessen agency and insurer administrative burdens, it would also serve regulatory purposes. Armed with information from a database, insurers and general agents or managers would lack the excuse of ignorance of a producer’s past record. The availability of such information should make it harder for general agents to overlook past transgressions when confronted with an opportunity to hire a super producer, since an adverse record would be much harder to conceal. With the availability of such information, insurers can be held more accountable for oversights in hiring of field agents.

It has also been suggested that consumers be able to access the database through the insurance department to ascertain if a particular agent has adjudicated complaints against him or her.

Building upon the foundation of a producer database, the NAIC may ultimately move towards a more uniform system of agent licensing, perhaps by developing a more uniform means of testing (although nonresident agents would still need to pass an examination as to issues applicable to the state in which they apply to do business) and more standardized applications and licensing and continuing education requirements. However, at least for now, the NAIC is not necessarily attempting to fashion uniform requirements or forms for agent licensing and continuing education. Rather, the NAIC is attempting to develop a system that is able to accommodate the wide variety of differing licensing requirements and procedures that currently exist. Through the use of modern technology, it is feasible to create a central data source (that is, the NAIC PDB) to compile the dissimilarities of the various states and to enable each state to select and use that which is deemed relevant to it.

As an outgrowth of the same pressures for improved treatment of agent licensing by multiple states, Congressman John Dingell introduced a bill that among other things seeks to address the lack of uniformity in agent’s licensing. (The bill’s major thrust is in the area of federal solvency regulation.) This federal approach would create a national regulatory body known as the National Association of Registered Agents and Brokers (NARAB) to regulate the activities of agents and brokers as well as to facilitate their ability to operate in any or all of the 50 states. The NARAB would use uniform producer application and renewal forms, create a clearinghouse for applying for licenses, and create a national database of regulatory information. It might also be used to facilitate the creation of a uniform system of education and training requirements through the establishment of membership criteria (that is, integrity, education, training, and so forth) and the prohibition against any state imposition of other requirements on NARAB members.

However, as an alternative approach to national agent licensing standards, some have suggested that the states could accomplish essentially the same thing through the use of an interstate compact.

A consultant or analyst is an individual, partnership or corporation who, for a fee, offers advice or service concerning the advantages or disadvantages promised under a policy of insurance as distinguished from soliciting or negotiating an insurance policy. Typically, the consultant is paid by the buyer of insurance for independent advice. Under the NAIC Model Agents and Brokers Licensing Act, to do business as a consultant, one must obtain a license which is conditioned upon successful completion of a written examination. The commissioner may conduct investigations concerning the applicant’s qualifications, affiliations, etc. The license is subject to annual renewal. The insurance commissioner can refuse, revoke or suspend a consultant’s license for reasons similar to those pertaining to agents and brokers. The Act also imposes specific duties on the consultant including (a) preparation of an outline of the work to be performed and the fee (such must be signed by both the consultant and the client) and (b) service to the client that is objective and loyal.