In this second of our three-part series chroniclingcompliance in the insurance industry, we move from the historicalunderpinnings of regulation and recent changes in regulatorylegislation to the current regulatory situation in insurance. In aword: it's complicated. 

Read: Part 1

Today's regulatory oversight of insurance — still the purview ofthe states — is designed to maintain a competitive balance in theindustry, largely by focusing on two distinct aspects of insurance:financial regulation and market conduct. The financial regulationwe see today isn't much of a mystery to the carrier or theregulator. All companies must prepare and present financialinformation in a transparent manner that makes clear all thefinancial aspects of insurance.

Selling and servicing insurance products

Over time, financial regulation has laid out a system offinancial uniformity that makes comparative information easier toobtain. If you've ever labored over an Annual Financial Statement,you may have been struck by the uniqueness of insurance as abusiness, as well as the structure of the information that makessolvency ratings possible.

One of the most expansive aspects of the McCarran-Ferguson Actis the enablement of states to regulate insurance, as well asrequiring states to establish regulations regarding the licensingof agents. The initial thrust of McCarran was gaining bettercontrol over who was selling and servicing insurance products. Itdidn't take long for regulators to expand their reach into otherareas of insurance.

While McCarran set up a regulatory framework for monitoringagent behavior, the introduction of mandatory insurance forautomobile liability in the late 1940s gave regulators much more toregulate. Prior to this time, the purchase of automobile insurancewas a voluntary act by the car owner. As automobile ownershipexpanded in the heady times after World War II, states passedfinancial responsibility laws that required all car owners to havea liability insurance policy.

Market conduct

Once those laws were passed "in the interest of public safety,"they became the rationale for regulation "in the public interest."Insurance regulation that is "in the public interest" fell underthe regulatory rubric of market conduct, which expanded the scopeof market conduct well beyond the mere regulation of agents. Nowthe states had the authority to regulate advertising, policywording, policyholder service, claims practices, underwriting,pricing, and so on.

Related: What should you do when a clientcomplains?

Over time, market conduct has become one of the most difficultareas for an insurance company to manage, as it can carrysignificant financial penalties as well as significant risk to thereputation of an insurance company. Ask any insurance company CEOabout compliance and it will be one of the top two or three keybusiness requirements for that organization.

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Agentlicensing and management

The licensing of agents, which initially was relatively easy tounderstand and to administer, has become a significantadministrative burden to most insurance organizations. Thirty yearsago, all one had to do to obtain an insurance license was to takean examination on the rules and regulations of insurance, and acorresponding exam on the type of insurance (life, health, orP&C) that the applicant was attempting to sell and service. Afew days after that, there was a newly minted insurance agent.

Related: Insurance carrier compliance: the rise of the chiefrisk officer

Insurance products are now quite complex; thus, insurancecompanies need exacting procedures to vet a potential agent andensure that he or she can fully represent their insurance productsto the public. As with many other businesses, ease in navigatingcarriers' compliance processes has become a competitivedifferentiator.

There's an old maxim in the U.S. Army that generals don't runthe Army, sergeants do. In an insurance agency, it isn't theproducers or the principals who run the business, it's the workingsupervisors and Customer Service Representatives (CSRs) who havethe key vote in determining the ease of working with a particularcarrier. And nowhere is ease of doing business more evident than inagent management and compliance.

Take, for example, something that is done on a fairly regularbasis in most insurance agencies, especially those that are alittle larger than average. Let's say an agency represents 10carriers — some that are "the best" and some that are "not quite asgood, but okay," and a remaining few specialize in certain types ofbusiness. If that agency were to bring on two new CSRs that need tobe appointed with the agency's carriers, it would need to collectall the pertinent license information from the producer'sdatabase.

In most instances, the onboarding process is conducted by snailmail, or at best by email.  Forms are completed andtransmitted, and after several days in process, probably with a fewphone calls in between, that CSR can be appointed. Keep in mindthat if there are 10 carriers, this step in the process must bedone 10 times.

Modernized onboarding

If a carrier has a modernized onboarding process, then theprocess can be accomplished simply by calling up the carrier'ssystem, inputting the relevant information on the new CSR, andtransmitting that information to the carrier. For an agencyconfronted with a carrier who does not support easy onboarding, theagency is stuck with the old laborious process, due to a carrier'slack of technology. As a result, that carrierisn't one that will be selected as easy to do business with.

Carriers view the onboarding process as the beginning ofcompliance, which is an ongoing process as new appointments aremade, continuing education is completed, licenses are renewed, andso on. While it may seem that this aspect of compliance isnecessary but not all that important, consider that of all thefines levied by insurance regulators in a given year, most will bedue to issues with agent licensing.

In the final part of this series, we'll look at how theincreasing complexity of agent management and compliance has led tothe need for industrywide process management.

John Sarich is vice president of corporate strategy forFort Lauderdale-based VUESoftware. Email him at [email protected] orcontact him via Twitter @SarichJohn or on LinkedIn.