Marketing and Distribution: Service/Support and Regulatory Oversight of Sales and Distribution
By Nick Ortner and Brendan Costello, with special thanks to Bruce Fuller and Mark Sayre (Section Council members) for their thoughtful review.
NewsDirect, May 2021
Building on our 2020 newsletter articles where we highlighted “Who Sells and Distributes” and “Compensation for Sellers and Distributors,” we finish our series here with our last exposition of distribution terms that may be unclear or misunderstood. Our focus in this article is on critical service and support components for sales and distribution, accompanied by a summary of the regulatory oversight of insurance sellers and distributors and a few common terms related to that oversight. As we did in our “Compensation” article, we intend the use of the term “agent” to also capture “brokers” and “producers” when referring to customer-facing sales experts, while appreciating there are subtle differences between those terms. Please also note that we are not lawyers and this article does not constitute legal advice, nor should this article be solely relied upon by any individual or firm.
Sales and Distribution Service/Support
Licensing and Training
Agents must obtain a license in each state they wish to sell in. Pre-licensure requirements (and the accompanying fees) vary from state to state. Education requirements often include minimum thresholds for general pre-licensing education and/or education in specific topics such as ethics and insurance codes. Additional steps prior to agent licensing typically include passing a licensing exam and submitting fingerprints and a criminal background check. Requirements for becoming an agent may also depend on the agent’s state residency.
States may have different continuing education requirements that agents must also meet to maintain their licenses. Agents selling products in multiple states must confirm they meet every states’ continuing education requirements. Typical requirements before license renewal may include 24 hours of continuing education for every two-year license term with three hours of ethics training.
Agents are also required to be licensed for each line of authority they sell. Common lines of authority include life (whole and term) insurance and accident and health (A&H) insurance. Agents can be licensed for more than one line of authority but may be required to take separate pre-licensing courses and exams for each line. States may also allow certain lines to be bundled together (e.g., agents may be able to apply for a license to only sell life insurance, or sell life, accident, and health insurance under one license).
Appointments and Just-in-time Appointments
Once agents are licensed, insurers must appoint agents to authorize them to sell the insurers’ products.
Insurers may use a just-in-time (JIT) appointment process to simultaneously comply with appointment requirements while minimizing appointment expenses, where permitted (state and JIT appointment requirements vary by state). Using a JIT appointment process allows the insurer to wait until agents submit their first application before appointing agents. Since a significant share of agents requesting appointments may never sell a policy, insurers may use a JIT process to limit payment of appointment fees to only those agents generating revenue.
Applications and Straight-through Processing
Prior to development of agent-supporting electronic platforms and marketplaces, the application process involved substantial paperwork and manual efforts from the agent, policyholder, and insurance company personnel.
Straight-through processing (STP) refers to the automation of transaction processing to streamline operations and minimize (or even eliminate) human intervention. Insurers’ use of STP has grown as technology has advanced. STP allows the insurer to realize cost efficiencies and can also provide agents (along with consumers and insurers) access to information in real time.
Advantages of STP include increased processing volumes, decision-making consistency, and overall productivity. Product complexity, inadequate models, incomplete decision-making hierarchies, insufficient or unreliable data, and inflexible legacy systems all pose challenges to wider STP implementation. STP usage rates may increase as use of data and analytics grows, core systems are replaced and updated, and the industry demands greater speed and consistency.
Agent portals are another critical contribution to successful sales and distribution operations. These electronic platforms and web-based tools deliver a comprehensive cross-section of real-time workflow and transaction capabilities that may include policy quoting, binding, and billing; dashboards and metrics; status inquiries; commission management and reporting; and case management for complex products.
The insurance regulatory environment, combining state-based financial oversight of insurers and protection of consumers with national coordination from the National Association of Insurance Commissioners (NAIC), has a long history better summarized elsewhere . Insurance regulation governs several functions that affect sales and distribution, including agent licensing, administration and monitoring of continuing education requirements, and market conduct assessments (which may include reviews of agent licensing and sales practices, among other issues).
States also focus on consumer protection, with regulatory responses including creation of reporting platforms (e.g., toll-free hotlines or websites) and special service units to address complaints against agents and insurers. State insurance departments may also sponsor educational seminars and publish brochures and rate comparisons to help consumers understand available products and their value.
Regulatory Oversight of Sales and Sales Practices
Agents are authorized to replace coverage on behalf of the insured (i.e., consumer) when done for the insured’s benefit. The illegal practice of churning occurs when an agent replaces a consumer’s policy with another policy from the same insurer that results in no changes to the coverage, provides no benefit for the insured, and yields additional commission for the agent due to the policy swap. Requirements for agents to inform consumers of policy changes and document policy modifications are commonly used to deter churning.
Twisting is distinguishable from churning in that it replaces a consumer’s coverage under one insurer with that of a different insurer while providing substantially the same coverage without benefit for the consumer and increasing compensation for the agent. Twisting is effectively “churning” of policies with different insurers. Such inducements (or attempts to induce) to drop an existing policy and take another policy often also use distortions or incomplete comparisons of the advantages and disadvantages of the policies.
Regulators try to combat churning and twisting by requiring additional documentation for policies sold to replace an existing policy.
Other illegal agent activity includes rebating, the giving or promising of something of value to induce the consumer to purchase insurance. The enticement may be cash or something else of value, with a common inducement to place business being the return of a portion of the premium or the agent’s commission on the premium.
An important protection offered to consumers buying a health or life insurance policy is the free look period. During this time, the purchaser has the option to cancel the policy with a full refund of payment without penalty (e.g., surrender charges). The length of the period generally runs from 10 to perhaps 30 days and may depend on the product, insurance company, and/or the purchaser’s state of residence.
In wrapping up this brief overview of service/support and regulatory oversight of insurance sales and distribution, we continue to seek feedback on this and earlier installments as we work to create an SOA Marketing and Distribution glossary that may help simplify and clarify some of the sales, marketing, and distribution terms and verbiage you may encounter. We anticipate continuing to add further to the discussion with ongoing articles and efforts surrounding marketing, sales, and distribution.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Nick Ortner, FSA, MAAA, is 2021 chair of the Marketing and Distribution Section and works as a consulting actuary with Milliman’s Health practice. He can be reached at firstname.lastname@example.org.
Brendan Costello, FSA, MAAA, is a friend of the Marketing and Distribution Section and served as 2020 chair of the section and works as a director and actuary at M Financial Group. He can be reached at email@example.com.