Actuarial Notes

Insurance Licensing

Study guide: Exam DISC-IA

Insurance Licensing is the state's control over who may transact insurance: an insurer may not do business in a state without a license from its insurance department, and the people who sell insurance or adjust claims for the public must hold licenses of their own. It is the regulator's first line of consumer protection, admitting only insurers that meet capital and other standards and only producers who have passed an examination, and giving the regulator a licence to suspend or revoke when the rules are broken.

\text{Admitted} \iff \text{licensed in the state where the risk is}

CS_{\text{req}} = \max\big(CS_{\text{state}},\ 15{,}000{,}000\big)

  • Symbols: The first line is the test for an admitted insurer in a given state. In the second, CS_{\text{req}} is the capital and surplus a U.S.-domiciled nonadmitted insurer needs to be eligible for surplus lines business under the NAIC Nonadmitted Insurance Model Act, and CS_{\text{state}} is the state's own minimum for a licensed insurer. The commissioner may accept less on an affirmative finding, but never less than $4,500,000.
  • Licensing insurers: An insurer may not transact insurance in a state unless it holds a license in force there or is exempt. The license, often called a certificate of authority, is issued for particular lines, and the NAIC's Uniform Certificate of Authority Application lets an insurer apply to many states on one form.
  • Domestic, foreign and alien: An insurer is domestic in the state where it is domiciled and licensed, foreign in every other U.S. state where it sells insurance, and alien if it was formed under the laws of another country. An Ohio insurer writing in Indiana is domestic in Ohio and foreign in Indiana. The domiciliary state leads the insurer's solvency supervision (Solvency Monitoring), while each state where it is licensed regulates its business there.
  • Admitted and nonadmitted: An admitted insurer is licensed in the state, so its rates, forms and conduct are subject to that state's rules. A nonadmitted insurer is not licensed there, and dealing with one is generally prohibited except through a lawful route, chiefly surplus lines.
  • Surplus lines: Surplus lines insurance is placed by a licensed surplus lines broker with an eligible nonadmitted insurer, usually after a diligent search shows the full amount or type of cover is not available from admitted insurers. A U.S.-domiciled surplus lines insurer must be authorized for the line in its home jurisdiction and meet the capital test above, and an alien insurer must be on the NAIC's Quarterly Listing of Alien Insurers. Large commercial buyers that qualify as exempt commercial purchasers skip the diligent search. Only the insured's home state's rules and tax apply to a nonadmitted placement. See Excess and Surplus Lines.
  • Licensing producers: Under the NAIC Producer Licensing Model Act, no one may sell, solicit or negotiate insurance for a line without a license for that line of authority. A resident applicant must be at least 18, pass the state's examination, complete any prelicensing course the state requires, pay the fees and have committed no act that is a ground for denial. The lines include life, accident and health, property, casualty, variable life and variable annuity, personal lines and credit. The license must be renewed, with continuing education, and the license itself gives no authority to bind an insurer.
  • Who does not need a producer license: An insurer itself, and its officers or employees who receive no commission and whose work is administrative, underwriting, loss control, inspection or claims, are exempt, as are salaried employees advising their own employer on its insurance.
  • Nonresident licenses and appointments: A producer licensed and in good standing in the home state receives a nonresident license in another state on application and payment, where the home state does the same for that state's residents, with no further examination. In states that require it, a producer who acts as an insurer's agent must be appointed by that insurer, which files a notice of appointment and must notify the commissioner within 30 days if it terminates the producer for cause.
  • Denial, suspension and revocation: The commissioner may refuse, suspend, revoke or not renew a producer license, place it on probation or fine the producer for causes that include false statements on the application, misappropriating premiums, misrepresenting policy terms, a felony conviction, unfair trade practices, fraud or incompetence, and losing a license in another state. No insurer or producer may pay a commission to a person who must be licensed and is not.
  • Adjusters: A public adjuster negotiates first-party property claims for the insured, for a fee, and under the NAIC Public Adjuster Licensing Model Act must be licensed, post a bond or letter of credit, use a written contract with the insured, and never pose as the insurer's adjuster. An independent adjuster is a contractor adjusting losses for insurers. Whether staff and independent adjusters need a license varies by state.

Classifying Insurers in One State Three insurers write business in Indiana: (1) an insurer incorporated and licensed in Indiana, (2) an insurer domiciled in Ohio and licensed in Indiana, and (3) an insurer formed in Bermuda, not licensed in Indiana, that writes Indiana risks through a surplus lines broker. Classify each as domestic, foreign or alien, and as admitted or nonadmitted in Indiana.

Answer

  1. Domestic and admitted. Indiana is its domicile, so Indiana leads its financial supervision.
  2. Foreign and admitted. It is licensed in Indiana but domiciled in Ohio, so Ohio leads its financial supervision while Indiana regulates its Indiana business.
  3. Alien and nonadmitted. It was formed under another country's law and holds no Indiana license. It may write there only as an eligible surplus lines insurer, which for an alien insurer means appearing on the NAIC's Quarterly Listing of Alien Insurers.

Can This Risk Go to Surplus Lines? A manufacturer wants a $10,000,000 product recall policy that no admitted insurer in its home state will write. The surplus lines broker proposes a nonadmitted insurer domiciled in Texas, authorized there to write the line, with capital and surplus of $12,000,000. The home state follows the NAIC model and its minimum for licensed insurers is $5,000,000. The manufacturer employs a risk manager, paid $250,000 of commercial property and casualty premium last year and has revenue of $80,000,000. Is the placement allowed?

Answer The insurer must hold capital and surplus of at least

\begin{align*}
CS_{\text{req}} &= \max(5{,}000{,}000,\ 15{,}000{,}000) \\
&= 15{,}000{,}000
\end{align*}

At $12,000,000 it falls short, so the placement is allowed only if the commissioner makes an affirmative finding of acceptability, which is possible because $12,000,000 is above the $4,500,000 floor. The diligent search is not needed in any case. The manufacturer has a risk manager, more than $100,000 of premium, and revenue above $50,000,000, so it is an exempt commercial purchaser. These dollar thresholds are the model's; some states index them to inflation and some don't.

Who Needs a Producer License? Which of these people need a producer license?

  1. An insurer's salaried underwriter who decides whether to accept applications and earns no commission.

  2. An agency employee who quotes auto policies to callers, recommends limits and is paid a commission on each sale.

  3. A producer licensed in Georgia who wants to sell homeowners insurance to Florida residents.

  4. A producer who was convicted of a felony after being licensed.

Answer

  1. No license. An employee doing underwriting, with no commission, is exempt.
  2. Licensed. Quoting and recommending coverage for a commission is selling, soliciting and negotiating.
  3. A nonresident license. Being licensed and in good standing in Georgia, she can obtain a Florida nonresident license without a Florida examination, if Georgia grants the same to Florida residents.
  4. Licensed, but at risk. A felony conviction is a ground on which the commissioner may suspend or revoke the license.

How it appears on the exam

  • DISC-IA: The Insurance Regulation section asks how insurers and insurance personnel are licensed. Questions classify an insurer as domestic, foreign or alien and as admitted or nonadmitted, ask when surplus lines may be used, or ask what a producer must do to be licensed and what can cost a license.
  • Personnel scenarios: A question describes a person's job and pay and asks whether a producer license is needed, as in the third example, or contrasts a public adjuster with an insurer's adjuster.
  • Related objectives: Licensing sits alongside Solvency Monitoring, State Rating Laws, Policy Form Regulation and State Market Conduct Regulation as one of the regulator's tools.

Exam traps

  • Foreign is another state, alien is another country: A Canadian insurer licensed in New York is alien there, not foreign. A New Jersey insurer is foreign in New York.
  • Nonadmitted is not unregulated: A surplus lines insurer escapes the state's rate and form rules, but the broker must be licensed, the insurer must be eligible, and the placement usually needs a diligent search of the admitted market first.
  • The license is not authority: A producer license lets a person sell for a line of authority. It does not let the producer bind any particular insurer, which needs an agency contract or appointment.
  • Public adjusters work for the insured: A public adjuster represents the policyholder against the insurer for a fee. Treating one as the insurer's representative reverses the relationship the license is built around.