Insurance Agency Regulation Must-Knows

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You’re ready to open your new insurance agency. You’ve gotten your startup capital, you’ve built a marketing plan, you’ve designed a website — but did you follow regulations?

You might not have even known insurance agencies are regulated until now, but they are, and the regulations are pretty specific. In an industry that serves to protect people in dire straits, it’s essential that each agency is on the up and up. 

Below, we’ll get into who regulates insurance agencies, what they regulate, and how your agency can stay ahead of the game. 

Who Regulates Insurance Companies?

Individual State Insurance Departments are responsible for all insurance agency regulations per the McCarran-Ferguson Act of 1945, which classifies insurance regulation as a public interest activity. This is both good and bad for your insurance agency. 

Regulations by state allow for more individualized work and allow you to cater more specifically to your clientele. That said, if you’re a digital agency operating on a national scale, this means you need to be highly aware of the regulation differences between states and, most importantly, where your clients are operating from. If you have clients operating in various states, you need a strong Agency Management System (AMS) to keep your regulations on track and up to scale. 

What Does the State Insurance Department Regulate?

The State Insurance Department exists to ensure insurance agencies aren’t taking advantage of their clients or committing any fraudulent actions. A protector against the protectors, if you will. Despite the fact that the average person yawns at the thought of insurance, the truth is that insurance agencies hold vast amounts of power when emergencies happen. If a client is unconscious in the hospital, someone needs to be responsible for making sure your insurance agency is running to code. 

The three main categories of regulation are licensing and capital, solvency and guaranty funds, and rate regulation. Let’s dive a little deeper into each of these categories. 

Licensing and Capital Requirements

While the specific numbers and licensing policies may differ between states, all insurance companies must be licensed in order to practice. You’ll know if your licensing process is complete when you receive your NPN or National Producer Number, issued by the NAIC (National Association of Insurance Commissioners)

Your type of license will depend on how you practice and your type of insurance. Even if you practice in multiple states, you’ll likely need to license within one ‘home’ state before you can register in others. That home state will be your ‘domestic’ license and any other state (or country) will be your ‘alien’ license(s). 

Required start-up/maintained capital will also vary from state to state, but it’s especially key to keep an eye on capital regulations if you handle worker’s compensation as most states (except Texas) require a surplus on top of existing capital in order to be compliant. This policy protects clients from being shorted if your agency is low on funds — especially in high physical labor states.

Solvency and Guaranty Funds

No one wants your agency to fall under, but you know as well as we do that nothing is guaranteed. That’s why you’ll need to join a guaranty fund as part of your startup process. 

A guaranty fund protects your unpaid clients in the event of your agency’s insolvency. It’s a scary thought, and certainly not something you want on your mind when starting a new business, but really, it’s insurance for your insurance agency. You’re creating a financial umbrella to protect your clients, but if that umbrella blows inside out because of metaphorically unexpected, gale-force winds, those people still need to be protected. 

Keep in mind, your regulators don’t want you to fail any more than you do. If your company is struggling, regulators will work with you to fix the problem before having you declare insolvency. It’s a required protection, not a warning. 

Rate Regulation

Rate regulation has the largest variance between states — some states don’t even have rate regulation depending on the client. However, where it exists, state rate regulation has three purposes: 

  1. To keep rates high enough to keep your agency afloat.
  2. To keep rates low enough that clients can pay them.
  3. To keep rates equal and nondiscriminatory across applicants pending claim and expense variants. 

When setting your rates, it’s important to note whether your home licensing state uses the prior approval or the competitive method. If your state uses the competitive method, you can set your own rates based on the market (within reason). If your state uses prior approval, however, you’ll need a regulator to sign off on your rate plan before you start contracting clients. 

It’s yet another step in the startup process, but it solves tons of problems down the line. 

How Do I Make Sure I’m Following Regulations?

Knowledge is power when it comes to regulations. Talk to your local NAIC representative, research your state, and invest in an Agency Management System (AMS). An AMS will keep your agency organized and your records intact so that when regulators need information, you are prepared. 

At NASA, we know small insurance agencies can’t afford to spend more money than absolutely necessary. That’s why we developed Eclipse. Eclipse is an affordable, state-of-the-art AMS that tracks clients, communication, finances, and more. 

When you have your client and financial information organized and at your fingertips, following regulations is simple. Request a demo of Eclipse today and start your agency on the path to a successful future.  

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Topics: Independent Insurance Agency | Insurance Industry