Introduction

Insurance agents and brokers (collectively, “producers”) must be licensed in every state where they sell, solicit or negotiate insurance. This requirement subjects producers to inconsistent standards and duplicative licensure outside of their resident state. To achieve uniformity and true reciprocity, many national insurance producer trade associations support new federal legislation. They argue that completely reciprocal licensure would produce a more efficient and less costly licensing process that would benefit consumers by increasing competition among insurance producers.

Introduced earlier this year as HR 5611, the proposed National Association of Registered Agents and Brokers Reform Act of 2008 (“Proposed Act”) was passed by the House of Representatives on September 17, 2008. The concept of a National Association of Registered Agents and Brokers was introduced nine years earlier in the Gramm-Leach-Bliley Act (“GLBA”). Under GLBA, if less than 29 states met reciprocal nonresident producer licensure requirements prior to November 2002, NARAB I would have been created. However, in August 2002, the NARAB Working Group of the National Association of Insurance Commissioners (“NAIC”) determined that 35 states had met the GLBA nonresident licensure requirements. Consequently, NARAB I was never created. Released earlier this year, the NAIC Producer Licensing Assessment Aggregate Reporting of Findings (“Aggregate Report”), listed 43 states that meet the GLBA reciprocal nonresident licensing requirements, with an additional two jurisdictions found to qualify after the Aggregate Report was released.

Despite the Aggregate Report’s conclusions of widespread compliance with the GLBA reciprocal nonresident licensure requirements, critics argue that true functional reciprocity is illusory in at least two respects. First, two of the larger insurance markets in the country—California and Florida—do not meet the GLBA reciprocity requirements. Second, many of the states determined to be compliant with GLBA reciprocal standards, in fact, impose additional requirements on nonresident producers that prevent true reciprocity. Among these requirements are registration with the secretary of state, in addition to the insurance department, and filing additional information with the insurance department.

NARAB II

The proposed Act would create NARAB II, a nonprofit corporation organized under the laws of District of Columbia. Unlike GLBA, the proposed Act would create NARAB II immediately and its reach would be nationwide, irrespective of the level of states’ reciprocity. NARAB II membership is intended to create a one-stop process for nonresident producer licensing. Although NARAB II membership would give producers the option of nonresident licensing that is fully reciprocal, the proposed Act would not adversely affect states’ authority to continue to license either resident or nonresident producers. Moreover, the proposed Act would leave states free to regulate unfair trade practices and consumer protection with respect to both resident and nonresident producers including NARAB II members.

NARAB II would operate as follows:

  • NARAB II membership would be optional. Any insurance producer licensed in its home state (state where the producer maintains its principal place of business or residence and is licensed as a producer) and satisfying membership requirements could become a member of NARAB II. In states where the requisite fees were paid, NARAB II membership would be the equivalent of a nonresident producer’s license.
  • A NARAB II member would be authorized to “sell, solicit, negotiate, effect, procure, deliver, renew, continue or bind insurance” in any state for the same line or lines of insurance covered under the member’s resident license.
  • States, other than a NARAB II member’s home state, would be prohibited from requiring an individual NARAB II member to obtain a business entity license (or membership) in order to engage in any activity as a nonresident producer, or to remit compensation to an employer, or employee or affiliate of such member.
  • States would be prohibited from imposing discriminatory laws, regulations, and licensing fees on a NARAB II member. States, other than a NARAB II member’s home state, would be prohibited from imposing any licensing, continuing education, or foreign company registration requirements on NARAB II members.
  • Members would be required to pay nonresident licensing fees to NARAB II, which would remit such fees to the appropriate nonresident states. Membership would be renewed biennially.
  • NARAB II membership applicants would be required to undergo a national criminal background check.
  • NARAB II would establish membership criteria, including standards for personal qualifications, education, training, and experience.
  • NARAB II would establish continuing education requirements comparable with the requirements of a majority of the states. NARAB II would be prohibited from requiring a member to satisfy continuing education requirements already satisfied through the member’s home state. Except for a member’s home state, no state may impose any continuing education requirements on a NARAB II member.
  • NARAB II would have the authority to place a member on probation or suspend or revoke membership for noncompliance with membership criteria or final state disciplinary actions.
  • NARAB II would be managed by a board of eleven members, of whom six would be NAICappointed state insurance commissioners and five would be insurance trade associationappointed representatives. If the NAIC or a nominating group of insurance trade associations fails to appoint a board member, the President would appoint such member from lists of candidates provided by the NAIC or such trade group.
  • NARAB II would establish a central clearinghouse and national database for regulatory information.

The proposed Act’s goal is to permit licensed insurance producers to operate nationwide after obtaining membership in NARAB II. The proposed Act addresses only marketplace entry for nonresident insurance producers. It would neither regulate resident producers nor interfere with a state’s day-to-day regulatory oversight of insurance producers, whether resident, nonresident or NARAB II members. Such regulatory oversight would include consumer protection and market conduct regulation.

Potential Issues

The proposed Act presents at least three issues. First, is the proposed Act consistent with the requirements of the Appointments Clause of the US Constitution? In this regard, do NARAB II board members exercise sufficient federal governmental authority that must they must be appointed by the President with or without the advice and consent of the Senate?

Second, there are concerns about the proposed Act’s requirements for mandatory criminal background checks and NARAB II’s authority to deny membership on the basis of a criminal record. Keith B. Nelson, the principal assistant attorney general of the Department of Justice, believes that applicants should have the right to receive a copy of any record used to determine eligibility and that the criminal background check should limited.

Finally, the proposed Act may require states to amend statutes and regulations to clarify the status of NARAB II members as equivalent to fullylicensed nonresident producers, although no license need actually be issued. State statutes and regulations may also require amendment to acknowledge the preemption of certain requirements such as business entity registration and prohibition against sharing commissions with a nonlicensed person or entity.

Conclusion

With strong support from major producer trade associations, the House easily passed the proposed Act on September 17. On October 2, it was received in the Senate and referred to the Senate Committee on Banking, Housing, and Urban Affairs. Although narrowly-focused and stronglysupported by producer trade associations, the proposed Act may encounter more opposition in the Senate. In this regard, the proposed Act is opposed on the one hand by those who support a much broader Federal role in producer regulation and, on the other hand, by those who wish to maintain the primacy of state producer regulation. An undetermined number of state insurance commissioners support the proposed Act (or least the concept of a single federal license) including Michael McRaith, Director of the Illinois Division of Insurance, who was recently quoted as stating that he thought it was “insane” that there is not a uniform federal licensing procedure for agents and brokers. Finally, the current economic crisis and results of the upcoming election may complicate consideration and Senate passage of the proposed Act.