Licensing of Insurers – New Appleman on Insurance Law Library Edition, Chapter 9

Licensing of Insurers – New Appleman on Insurance Law Library Edition, Chapter 9

   By Julie McPeak

This chapter begins with a description of the issues prevalent in the initial formation of an insurance company, from the perspective of the organizers and the state insurance regulators. Often, matters of concern to regulators opining on the adequacy of the application for insurance licensure may be addressed by incorporators at the early stages of company formation. The form of capitalization, choice of officers and directors and the creation of the company's business plan each affect the regulator's determination whether to authorize the company to participate in the business of insurance within the state.
 
Section 9.02 begins with a history of the state system of insurance company licensure and the public policy considerations in the federal delegation of regulatory authority to the states. Licensure considerations for insurance commissioners vary between domestic and foreign insurers, with non-domiciliary states relying on the judgment and supervision of domestic regulators. As a result, regulatory deference is given to the decisions of domiciliary commissioners. Insurers domiciled in countries other than the United States present additional and unique concerns for insurance departments weighing a grant of authority from the state. A discussion of the National Association of Insurance Commissioners' uniform application for company licensure is included, as well as state regulators' processes for analysis of petitions for licensure.
 
Recognizing the need for uniformity in company admission standards and forms, the National Association of Insurance Commissioners ("NAIC") adopted a model law on the organization and ownership of new insurance companies. Minimum standards for state review are included in the model and a process of primary and renewal accreditation by the NAIC ensures the states perform substantive analysis of company applications and have the adequate authority and resources to enforce company licensure standards.
 
Following the history and process for a company to obtain a certificate of authority within a state, the various types of insurer licenses are examined. Commercial insurers generally hold a certificate of authority, by line of insurance produced; however, the certificate may include specific restrictions as to premium volume or available products. Alternative risk entities, defined as captive insurers, risk retention groups, fraternal benefit societies, and risk purchasing groups, usually are not granted a certificate of authority but must be approved to operate within a state. Some states require alternative risk entities to register with the department of insurance to engage in the business of insurance in the state. Health discount plans are regulated differently in each state. Some state insurance regulators supervise discount plans, while in other states the attorney general or other officials have jurisdiction over the plan's operations.
 
The specifics of the uniform certificate of authority application are discussed in Section 9.05. Three different uniform applications are available for companies: the primary, expansion and corporate amendment application. The primary application is utilized for a company's initial licensure or a redomestication of an existing insurer. A licensed company would submit an expansion application to augment its market by seeking licensure in additional states. A corporate amendment application is filed by a licensed company seeking one or more revisions to its original certificate of authority. One of the more comprehensive attachments required for the submission of an application is the biographical affidavit required of all key company personnel. The affidavit includes information on each individual's employment, education and personal information and is used for an independent background investigation that is created for the review of the state regulators. Commissioners utilize the biographical affidavit and background investigation to determine whether the individual has the character and integrity to participate in the insurance industry. Further, eight states review fingerprint images for additional background information on the individual.
 
Once an insurer is licensed, the company submits to the immense authority of state regulators. Specific exercises of authority are addressed including record inspection, subpoena power and the ability to compel testimony, required filing of financial statements and the manner and quality of insurance company investments. Insurance departments also frequently require special deposits of cash or securities to be held for the benefit of policyholders, as a condition to operate within the state.
 
The comprehensive authority of the insurance commissioner may also be employed to revoke or suspend an insurer's certificate of authority. Licensure revocation is an onerous penalty that is usually only applied in extreme circumstances. A regulator must be convinced that the business operation or financial condition of an insurer is so egregious that revocation is justified, despite the resultant loss of a competitive participant in the market. Each state has adopted statutory grounds for revocation of a company's certificate of authority and courts have reviewed the actions of the insurance departments with varied decisions. In lieu of, or prior to a licensure revocation, an insurance commissioner may elect to suspend the certificate of authority for a company. The effect of a certificate suspension varies by state. The courts have generally upheld the commissioner's actions regarding suspension of insurers' licenses.
 
Transacting the business of insurance without the proper licensure constitutes engaging in the business of unauthorized insurance, a practice insurance regulators abhor. States have adopted statutory authority to prosecute companies, agents and other persons participating in unauthorized insurance schemes, both civilly and in some states, criminally. Insurance commissioners have authority to accept service of process for unauthorized insurers and prevent an unlicensed entity from participating in pending litigation without first filing a bond or becoming licensed in the state.
 
Occasional placement of insurance with companies that are not licensed within the state is permitted pursuant to surplus lines statutes. States have developed a procedure to place difficult or unusual risk with insurance policies issued by companies that are not licensed in the state where the risk is located. This process allows the exporting of coverage to a nonadmitted insurer after a reasonable attempt to obtain the policy through a licensed insurer and with the consumer's knowledge of the unlicensed status of the insurer. Brokers are charged with the due diligence efforts, reporting of the transaction to the state insurance department and remitting the appropriate premium taxes to the state. Insurers and brokers that specialize in the surplus lines market have supported federal legislation to streamline the collection and apportionment of premium taxes payable and to require the application of uniform standards for broker licensure and company eligibility to participate in the nonadmitted market.
 
Despite the historical foundation for the state-based system of insurance regulation, the federal government has recently been encroaching on the state regulatory structure. Federal regulation of self-insured employer sponsored health benefit plans is governed by the Employee Retirement Income Security Act of 1974 ("ERISA"). Further, multiple employer welfare arrangements are defined by ERISA to be jointly regulated by the state and federal government. Liability risk retention groups are sanctioned by federal law and preempt all but a very few state insurance regulatory statutes. Finally, the federal government created a waiver program for prescription drug plan sponsors of Medicare Part D benefits that allows a company to offer the health benefits in a state without the need to immediately comply with licensure by the state department of insurance.
 
Federal involvement in the regulation of insurance is currently at a precipice. The recent financial impairment and failure of several large financial service companies have renewed the interest and desire to overhaul the financial services regulatory system. Gaps in regulatory oversight have been identified and the necessity of coordinated oversight of significant companies that have the ability to effect the United States economy are the subject of compelling and frequent debate.
 
Julie Mix McPeak is Of Counsel, Burr and Forman LLP, Nashville, Tennessee. Ms. McPeak is the former Executive Director of the Kentucky Office of Insurance and served as chair of the National Association of Insurance Commissioners' Life Insurance and Annuities Committee.