This post is part of a series sponsored by AgentSync.
Whether you call it an insurance agency or a business entity, the activities of some insurance industry-related companies are subject to regulatory scrutiny for policies, payments, and procedures, while others are not. Saying the difference and deciding what is an authority for supervisory purposes is a matter of nuance.
The word mix that makes up the insurance industry often includes companies with unclear roles and frustratingly vague descriptions – think of FMOs, IMOs and NMOs, or aggregators, or MGAs, or brokerage firms. This is not to mention individual and family practices, companies or agencies. Or consider methods that border on securities such as registered investment firms or brokers. Very quickly, setting up an agency or insurance “business unit”; becomes a matter of knowing it when you see it, but setting up that knowledge to strengthen ink (or pixels, so to speak) is another matter.
As we delve into the existential issues of agencies, business units and regulations, remember that this blog is not comprehensive, it is not very authoritative and, most importantly, it is not your internal legal advisor. So if you have questions about what rules apply to you and your business, specifically, this may raise some questions for you to inspect further, but finding the answers will be a matter for your state regulator or actual lawyer.
Regulators – legal definitions and licensing
It seems like it would be uncomplicated. Still, in the definition of what constitutes a “business unit”, there is a good page with discussion notes in the National Association of Insurance Commissioners’ internal documentation. Is an agency an organization that is assigned assignments? Is it licensed? Is there anyone or anything that helps a producer sell insurance?
As is so often the case in the insurance industry, part of the discussion varies greatly between different states. The nuances of regulation that are specific to agencies are quite different, whether you are looking at licenses, appointments, connections, DRLPs, etc.
Broadly speaking, however, a business entity should be licensed (in the states where it licenses agencies) or seen as an agency when
- have employees or contract employees who are producers or benefit from allocated commissions from insurance producers and
- are involved in the sale, negotiation or acquisition of insurance and
- is not an insurance company or adjuster
Basically, if a business unit gathers producers and has an incentive to help them sell insurance, then it is an insurance agency and will need to comply with appropriate government licensing requirements.
This is also one reason why we have seen warnings such as those issued by Commissioner Jim Donelon of Louisiana to insurance-related industries such as banks or real estate, where those who refer business to insurance agents cross a line to recruit or negotiate. If these professionals or entities go too far into the insurance business, they will be regulated (ie punished) as an unlicensed agency.
The structure of an agency
An insurance agency can have a variety of structures. To give you an idea of what this looks like, West Virginia’s guide to insurance agencies says:
“Insurance Agency” means an individual, company, partnership, association, limited liability company or other legal person other than an employee of the individual, company, partnership, association, limited liability company or other legal person, and other than an insurer or an adjuster as defined in section twelve-b [§ 33-1-12b], article one of this chapter, which employs individuals who are licensed to engage in business or whose members engage in any business is performed only by a licensed individual insurance producer or attorney. It shall not cover sole proprietorships or partnerships where there is only one licensed insurance producer. “
This is pretty typical of it
- Almost any structure or type of business can be an agency though
- Even many states that require agencies to have a license do not recognize sole proprietorships as agencies unless there are multiple insurance manufacturers in the store.
DRLPs, connections and agencies
As we have discussed elsewhere, states require authorities to report a designated responsible licensed person, who usually must be
- An official, director or partner in the business
- Licensed within the line or authorities that the business conducts
In states that do not require or allow agencies to have their own license, the DRLP license is generally considered synonymous with the agency’s ability to write business. If DRLP loses its license, the agency’s and its producers’ ability to continue selling is in jeopardy.
In some states, DRLPs are the only producers that must have an agency affiliation. In others, states require agencies to report all agencies that sign their contracts and use their agency relationship to secure meetings with carriers.
Connections are also difficult to maintain because most states either require agencies to maintain an internal register, or to report affiliated producers through individual or state portals, so there are no options for a central bulk reporting function such as NIPR.
Appointments for business units
Just like connections, the appointment regulations are spread out and there is a double standard for authority-specific appointment requirements. Some states require business units to be designated by the carrier, and it does not matter whether the business units’ producers are appointed or not. Others require individual producer appointments but do not allow appointments of business units. And then some demand that every person, business unit or walking logo have a meeting if they plan to sneeze at an insurance contract and get paid.
Branch branch rules add a whole new aspect to the existential agency issue, as some states require each branch to be treated as if it were an agency in its own right, with separate licenses, accession registers, meetings and contracts. Other states, such as Texas, have switched to treating the agency as having a one-per-state designation and rolling up all other branches under it for reporting purposes.
Because government regulations vary and are so important to the definitions and requirements of agency-based rules, it can be difficult to keep track of what level a particular company is at in a distribution pipeline. If you’re ready to get some clarity about your partners – regardless of jurisdiction – and ensure full stack compliance with relevant guidelines, see how AgentSync can help.