Insurance Regulation: State and Federal Roles, Licensing, and Producer Duties
Who regulates insurance
Insurance in the United States is regulated primarily by the states. The McCarran-Ferguson Act (1945) confirmed that states regulate the business of insurance and exempted insurer activities from federal antitrust law to the extent those activities are regulated by state law. Test writers love to offer "the federal government regulates insurance" as a distractor. Each state insurance department, headed by a commissioner, director, or superintendent, licenses producers, monitors solvency, conducts market-conduct exams, and enforces consumer protection statutes. Federal law still reaches insurance in specific areas: the SEC for variable products, ERISA for employer benefit plans, the IRS for taxation, HIPAA for privacy and portability, and anti-money-laundering/OFAC requirements.
Licensing and conduct
A producer must hold a license for each line of authority, be appointed by the insurer, and complete continuing education. The license is a privilege; the commissioner may deny, suspend, revoke, fine, or place on probation. Producers act in a fiduciary capacity with premium dollars, must remit promptly, and must never commingle funds. Prohibited unfair trade practices include misrepresentation, twisting (misrepresentation to induce replacement), churning, rebating, defamation of an insurer, coercion, boycott, false advertising, and unfair discrimination. Replacement of existing coverage triggers disclosure obligations.
Authority of the producer
Express authority is written in the agency contract; implied authority is what is reasonably necessary to carry it out; apparent authority arises when the insurer's own conduct leads a third party to believe authority exists. The insurer is bound by acts within an agent's authority; an agent represents the insurer, while a broker represents the applicant.
Rule of thumb
If an answer choice says the federal government licenses insurers or producers, it is wrong. Remember: states license and discipline; the federal government taxes and (for securities-based products) registers.