Insurance Regulation and Licensing
Who regulates insurance
Insurance is regulated primarily by the states. The McCarran-Ferguson Act (1945) ceded regulation to the states, so the NAIC is not a regulator - it drafts model laws and model regulations that states may adopt in whole, in part, or not at all. Federal law still reaches insurance in specific areas such as variable products (securities law), ERISA benefit plans, and taxation.
The commissioner's toolkit
The state insurance commissioner (director or superintendent) licenses and revokes licenses, investigates consumer complaints, examines insurer solvency and market conduct, approves policy forms and rates where required, adopts rules, issues cease-and-desist orders, levies fines, and can place an insurer in rehabilitation or liquidation. Commissioners are usually appointed by the governor; statutes come from the legislature.
Licensing mechanics
A producer must hold a license for the correct line of authority (life; accident and health), complete prelicensing education, pass the state exam, submit fingerprints, and satisfy continuing education. A license alone does not permit business: the insurer must appoint the producer, and appointment typically must be in force before the first application is submitted. Producers hold premiums in a fiduciary capacity; commingling funds is prohibited.
Unfair trade practices
Prohibited conduct includes misrepresentation, twisting (misleading comparison to induce replacement), churning, rebating (offering anything of value not stated in the policy), illegal inducements, unfair claim settlement practices, and splitting commissions with an unlicensed person. Replacements require a notice and comparison form signed by the applicant.
Trap: items that imply the NAIC licenses producers or that federal agencies police insurance advertising. Rule of thumb: license → appointment → solicit → commission.