Insurance Regulation and Licensing
Who regulates insurance
Insurance is regulated mainly at the state level. The McCarran-Ferguson Act (1945) left regulation to the states and gave insurers a limited antitrust exemption; there is no federal agency that licenses producers. Each state insurance department is headed by a commissioner or director (appointed in some states, elected in others) who licenses insurers and producers, approves forms and rates, examines solvency, and conducts market conduct examinations. The NAIC is a voluntary association of regulators that drafts model laws, model forms, and maintains the producer database used for licensing. A model law has no legal effect until a state adopts it - a favorite distractor.
Licensing mechanics
An insurer must hold a certificate of authority to be admitted. Producers must be licensed in every state where they transact business; nonresident licenses are issued through reciprocity. Insurers appoint producers and must notify the state when appointments terminate.
Prohibited practices to recognize
- Rebating - offering any inducement not stated in the policy (cash, gifts, paying part of a premium).
- Twisting - misrepresentation that induces a policyholder to lapse or replace coverage.
- Commingling - mixing premium dollars with agency operating funds. Premium is held in a fiduciary capacity.
- Misrepresentation, false advertising, unfair discrimination, and unfair claim settlement practices.
Solvency backstop
If an admitted insurer becomes insolvent, the state guaranty association pays covered claims up to statutory limits; nonadmitted surplus lines carriers are generally not covered.
Rule of thumb: if an answer choice says the NAIC requires or enforces something, it is usually wrong - only the state commissioner has that authority.