In this final part of our series on compliance in the insurance industry, we look at how the best companies are employing technology — in particular, process management — to deal with the ever more complicated business of keeping up with compliance.
It's always an interesting exercise to discuss the structure and management of agents with an insurance executive. For most insurance companies, how they manage agents is usually by employing a shared services model, with several departments responsible for various aspects of agent management. Typically, accounting manages agent compensation, a field organization is responsible for contracting and managing agents, and an administrative group might make agent reports to administrators or to compliance personnel. When asked why they don't have a single department focused on agents, the usual answer is, "We've always done it this way."
As insurance carriers begin to realize that the agent-management function is extremely important to the overall success of the company, the consolidation of agent-management functions is becoming a new link in the insurance company's value chain. Rather than viewing agent management and compliance as a "necessary evil," companies are realizing that good agent management, with the correct tools and systems, makes a significant difference. Some of the benefits include increasing revenues, lowering loss ratios, enhancing agent–carrier communications, and reducing exposure to risks of noncompliance. These are significant factors in making compliance a key market differentiator.
Complexity of the insurance industry
Insurance regulation, led by the National Association of Insurance Commissioners (NAIC) and the 50 states' departments of insurance regulation, has taken on a new meaning over the course of time. Understanding the complexity of the insurance industry, regulators decided to require continuing education so agents could — and were expected to — keep up with emerging and changing issues in insurance. As with most regulation, in some areas, changes to insurance regulation must be made to prevent the act of complying with the regulation from becoming onerous or problematic.
This was the case with continuing education for agents. It was one thing to issue an agent a license to sell insurance, and to then keep track of that agent. It has proven much more difficult to develop systems and procedures to keep track of an agent's continuing education. In fact, since the honor system didn't work to properly administer agent compliance, more than a little technology had to be invented to do the job. The most important technology required was database management (initially the 80-column punch-card variety) where a state, through NAIC's Producer Database, could verify information on an individual agent. Over time, producer-validation processes became easier to manage, but the sheer volume of agents in the database made the task of verifying accuracy difficult.
As the one-stop financial marketplace has emerged wherein a policyholder can work with an investment advisor who sells all types of investment products — including insurance products — other regulators are working on additional areas of compliance. Although the life insurance industry is familiar with federal requirements for being licensed to sell certain investment products under the regulation of the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA), they need to be prepared for very different regulations from those FINRA is developing.
Consumer-driven wave of regulation
Some of the more interesting regulations FINRA is issuing are entity based. For example, an advisor must be assigned to each branch location, meaning that an advisory firm with five locations must have an advisor reporting to FINRA. It might not seem like much, but for many investment firms with multiple locations—and the typical turnover so common in financial services — suddenly a huge administrative burden emerges.
As this consumer-driven wave of regulation continues, the insurance industry is also preparing for the licensing of adjusters. Although the principle of licensing claims personnel seems, on the face of it, to be analogous to agent licensing, different rules are forthcoming from the NAIC. For example, it alters the concept of residence from what has been the norm in agent licensing. Naturally, all the typical licensing requirements of a background check, credit checks, anti-money laundering, and education will also be part of adjuster licensing. Compliance is an area that undergoes continuous review by the industry and by regulators.
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The need for process management
Most insurance companies and agents recognize and understand the need for regulation, and they're in support of regulators keeping the playing field level and eliminating those who refuse to adhere to the rules and requirements. But those who are responsible for managing the day-to-day work that keeps agents and their companies in compliance require technology that is much more encompassing than using a simple CRM system or database — or worse yet, a largely manual system that makes each appointment an adventure — to manage these complex processes.
The backbone of managing agent licensing is the National Insurance Producer Registry (NIPR), whose Producer Data Base (PDB) contains licensing and appointment information of each licensed agent. It is the responsibility of the agent to maintain their own information and keep it current—for example, by completing a continuing education (CE) course that meets the CE requirement for that particular agent. And it is against the NIPR database that carriers must ensure that their agents, when submitting an application for insurance for a prospective client, are licensed and appointed for the lines of insurance that are being proposed in the application. Obviously, with thousands of agents and many thousands of applications being submitted each day, the smooth functioning of NIPR's database is vitally important to ensuring compliance.
Though the majority of carriers have adapted to working with NIPR, most internal process steps are manual, and the process steps are etched in an employee's memory. Although most carriers can point to the fact that they are "keeping up" with compliance, they are in fact falling behind those carriers who have automated processes. For example, the multistep process that entails pulling a record from the PDB can be automated into a simple, one-step process that accesses licenses, with fully automated processes for appointments and terminations, immediate access to regulatory actions against producers, and complete automation of just-in-time appointments. This eliminates all the cumbersome and often inaccurate steps that make up many licensing compliance functions in carriers today.
The key to moving from old processes to automation lies in direct connectivity to the PDB. That connectivity enables the ability to reconcile demographic, licensing, and appointment data, as well as any regulatory actions against an agent, by automating them.
Compliance is here to stay
A truly interesting aspect of this industry is that insurance companies rarely fail. The financial crisis of 2008 saw a few insurance organizations with financial problems, but by and large, the self-regulating aspect that is unique to insurance enabled all of the companies to stay in business.
Only in insurance are you financially tied to your competitors, such that if one does fail, the competing companies are assessed a portion of the financial loss through the state guarantee fund. This ensures that policyholders always remain whole. That "I am my brother's keeper" mentality is one of the regulatory features that is unique to insurance.
In many ways, our industry is a world unto itself. But it also shares a commonality with all large, legacy enterprises. Looking at the complicated history of an increasingly complex regulatory system, with so many layers of activity and the rules overseeing it, insurance companies can gain insight into the need to keep process innovation at the forefront in order to maintain their market agility and not get tangled in a web of compliance mandates.
John Sarich is vice president of corporate strategy for Fort Lauderdale-based VUE Software. Email him at John.Sarich@vuesoftware.com or contact him via Twitter @SarichJohn or on LinkedIn.
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