Agent Licensing Group Expects MGA Model Vote In September

Dennis C. Burke, a representative of Everest Insurance Company in Liberty Corner, N.J., asked the working group to reconcile an apparent discrepancy involving the statutory definition of "negotiate." Mr. Reed in turn invited him to submit suggested language.

"Theres a new definition [of negotiate] being added in Section 2F [of the MGA model act]," Mr. Burke explained. Section 2F, he said, defines negotiate as "the act of conferring directly with or offering advice directly to a purchaser or prospective purchaser of a particular contract of insurance concerning any of the substantive benefits, terms or condition of the contract, provided that the person engaged in that act either sells insurance or obtains insurance from insurers for purchasers."

Mr. Burke pointed out that "the word negotiate is used in the new definition of an insurance producer," which is where he believes the drafters intended the definition to apply. However, "negotiates" is used in the definition of an MGA under what is now Section 2E(2), he stated.

"Any time you talk to a general agent about what commission youre willing to pay–if you are not a whole-account underwriter and you rely on some reinsurance–youre going to have to talk to that person about the cost or expected cost of your reinsurance," Mr. Burke said. "By having the new definition of negotiate [under Section 2F] apply to the definition of an MGA, everybody becomes an MGA."

James Roe, board member and past president of the American Association of Managing General Agents, headquartered in Overland Park, Kan., explained to the working group that the term "managing general agent" is subject to several definitions.

As an example, he stated that, although he calls himself an MGA, he would not fall within the model act because he does not place reinsurance and he functions more as a general agent.

He added that the 250 active members of AAMGA would not qualify as MGAs under the statutory definition. Mr. Roe suggested that this could be why the working group had received no input from his organization or its members.

In response, the working group's other co-chair, Sam Meyer of the South Dakota Division of Insurance, stated that the term as used in the model act was always intended to apply narrowly. He explained that there are MGAs that exercise the authority described in the model act, "which could jeopardize the solvency of a company."

Mr. Reed suggested deleting subpart "a" of Sec. 2E(2), which refers to an MGA who "adjusts or pays claims in excess of an amount determined" by the state insurance regulator. But some working group members favored keeping the subsection intact, while others favored changing the word "or" to "and."

The working group did not reach a decision on this matter, which apparently will be one of the issues to be worked out in their interim conference call.

Meanwhile, a positive report on the status of producer licensing legislation throughout the country this year–with one major caveat–was delivered to the working group by an insurer association representative.

"We have quite a success story to tell," according to Larry E. Kibbee, vice president and director of public affairs of the Downers Grove, Ill.-based Alliance of American Insurers.

Referring to a map showing the degree of legislative activity on producer licensing in the United States, he demonstrated that 35 states have enacted or are on the verge of enacting legislation that complies with the reciprocity provisions of the Gramm Leach Bliley Financial Services Modernization Act and with the model producer licensing act propounded by the NAIC.

Mr. Kibbee added that he had learned that the Nevada legislation had passed a producer licensing law the preceding day. This means that 31 of those pieces of legislation will have been signed into law in the first six months of 2001, he noted.

Because GLB requires that a "majority" of the states–widely interpreted to mean 29 jurisdictions–have reciprocal or uniform producer licensing legislation or regulations in place by October 2001, at first blush it appears that the threat of federal takeover of producer licensing is abated, Mr. Kibbee indicated.

But as he pointed out, those 35 states represent only 55 percent of the total resident and non-resident producers in the country and 48 percent of direct written premiums.

Mr. Kibbee drove home the point raised repeatedly by the Alliance and other insurance trade groups that there is no true compliance with GLB without producer licensing legislation in the eight jurisdictions identified as comprising about 34 percent of total U.S. producers and 44 percent of total premium volume. Those jurisdictions are California, Florida, Michigan, Massachusetts, New Jersey, New York, Ohio and Pennsylvania.

He did report that legislation now appears to be moving quickly through the New Jersey legislature and that legislation is pending in Ohio and Pennsylvania. He also stated that "Massachusetts is one issue away" from moving a bill through the legislature.

(After the meeting adjourned, Mr. Kibbee told National Underwriter that the one issue holding up legislation in Massachusetts is "the commission-sharing piece of the model act." However, he believes that this issue can be resolved soon.)

Mr. Kibbee also stressed to the working group that only about four or five of the 35 states have producer licensing laws that fully adopt the reciprocity and uniformity provisions of the model act; the other states have adopted only the reciprocity provisions.

Mr. Reed of the Delaware insurance department noted that in Delaware a producer licensing bill had reached a House committee the preceding week and that he expected it to reach the House floor shortly.

In the meantime, there was some controversy about the proposed NAIC Third Party Administrator Model Act. Neeraj Gupta, chief financial examiner of the insurance department in Oregon, a state that requires annual financial statements from TPAs, described his experience with those statements.

"Its a nightmare to look at some of those statements. They follow no accounting standards" and are not prepared in accordance with the Generally Accepted Accounting Principles prescribed by the American Institute of Certified Public Accountants, Mr. Gupta told the working group.

As a result, Oregon asked the working group to consider amending Section 13A of the TPA model act–the section requiring annual reports from TPAs–by adding the following sentence: "The annual report shall include an audited financial statement that is based on an annual audit performed by an independent certified public accountant."

Mr. Gupta acknowledged that the requirement would mean a considerable expense for the industry. But he said that Oregon believes that national uniform standards are necessary and that regulators would be able to rely on the financial statements and "not end up auditing" deficiently prepared annual statements.

Hugh Alexander of Alexander & Crabtree, P.C., a Denver law firm specializing in insurance matters, told the working group that forcing TPAs to submit audited financial statements as part of their annual reports to insurance regulators was unnecessary, expensive and another instance of "overregulation."

Instead, he advocated relying on the TPA's home state to detect irregularities in the annual statements. Mr. Alexander disagreed with the suggestion that audited financial statements would help prevent fraud.

Ultimately, the working group voted unanimously in favor of amending Section 13A and, for the sake of consistency, Sections 13D1 and 2 to require audited financial statements in annual reports by TPAs.

Reproduced from National Underwriter Edition, June 22, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.

Contact Webmaster