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Additional Reform Needed for Uniform Producer Licensing Laws

Despite monumental advances since the Gramm-Leach-Bliley Act encouraged state action on producer licensing, much remains to be accomplished to achieve the system-wide, comprehensive modernization...
August 1, 2004

By Tim Kovac
Director of Business and Compliance Affairs
PIA National

Despite monumental advances since the Gramm-Leach-Bliley Act encouraged state action on producer licensing, much remains to be accomplished to achieve the system-wide, comprehensive modernization reforms to the regulatory oversight of insurance producers. While the states, the NAIC, trade associations, carriers and producers are all working toward achieving this goal, problems still exist in the form of variations from state to state in adoption of producer licensing laws and the understanding of carriers and regulators as to what constitutes acceptable business practices.

While the large majority of states have adopted all or most aspects of the Producer Licensing Model Act (PLMA), each has made changes that have effectively deteriorated the very purpose of the model - to achieve a common oversight, meaning, and process for producer licensing across the country. Significant efforts still need to be made to address these inconsistencies from state-to-state and to foster a better, common understanding of the marketplace from the producer's perspective.

To demonstrate the differences and confusion that have resulted from states' efforts to implement the PLMA, one need only look to the June 9, 2004, draft of the NAIC's Uniform Resident Licensing Standards Survey Responses. In surveying states' compliance with the various requirements of the model, the survey shows that: (1) only 12% of the states comply with the model's continuing education hours requirement; (2) 46% comply with the model's pre-licensing waiver/exemption; (3) 66% comply with the background check provisions; and (4) 32% comply with the continuation process set forth in the model. In most instances, it's a statute or regulation in the non-complying state that prevents compliance.

While this is not to say that compliance is lacking across all sections of the PLMA (some areas have compliance rates of 98%, 99% and even 100%), it is obvious that continual efforts are needed to meet the goal of uniformity. These inconsistencies among states need to be eliminated to ease the burden of compliance on producers and carriers. Accomplishing this would remove a good portion of the inefficiencies of the current landscape, which not only hamper the insurance industry but prove harmful to the consumer as well. Further, doing so is imperative if we are to be successful in creating and adopting the next series of reforms.

Another problematic aspect of reform to date is the regulators' and carriers' understanding of what constitutes current and preferred acceptable business practices. Carriers involved in the process tend to put forth the concepts of ideal business practices as they individually and currently follow. While this is to be expected to some degree, it ignores the significant fact that there are many variations to business practices in use by different carriers and producers, all of which are legal and legitimate.

If the trade associations and regulators accept one single-minded notion as the mode of preference, a very rigid idea of business practices will result, one that does not allow for the flexibility needed to deal with the often-changing marketplace. More significantly, this may create a competitive advantage for those already utilizing the preferred practices and an extreme competitive disadvantage for those that are not and perhaps for other legal reasons cannot.

One area in which this is most obvious is captive systems versus independent agency/brokerage systems, especially as they operate in property and casualty and life and health. The historical differences between these worlds made sense, allowing each to operate simultaneously without adversely affecting the other because carriers were "pure" in their operations, i.e. only doing property and casualty or life and health business with insurance producers that only sold one or the other.

Today, independent insurance agencies and insurance brokerage firms comprise the largest growing producer group writing all lines of life and health business. And these producers are doing so with carriers that are exclusively life ad health insurers that traditionally only did business through their captive force. Consequently, these carriers and life insurance regulators find it difficult to relinquish past mandates in practices even when they are inappropriate, unnecessary or create legal conflicts for independent agencies' life and health engagement. This practice exists even when the licensing issues apply to all insurance producers.

It is important that the insurance industry as a whole (the carriers, regulators and producers) understand that only a first step has been taken to achieve uniform producer licensing standards. Recognizing this and the issues involved in completing the task at hand places PIA in the enviable position of leading the next round of reforms.

PIA recognizes that its members are quickly extending into other markets and need to have uniformity to ease the compliance burden of operating in these new lines and states. PIA also recognizes that flexibility is a key component to successful insurance production. Therefore, PIA will continue to push for uniformity, but in such a way that our members will not be handcuffed to rules that do not mesh theory and practice in the marketplace.

Tim Kovac is Director of Business and Compliance Affairs for PIA National.

This article originally appeared in the July/August 2004 PIA Connection.

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