Want to build in insurance? Learn these licensing rules first.

Any person or entity that sells, solicits or negotiates insurance must be licensed as an insurance producer (“producer” is a general term for an agent or broker) or qualify for an exemption from such licensing requirements. (Credit: Oulaphone/stock.adobe.com)

Embedded insurance products are often tightly integrated with a company’s website to allow its customers to seamlessly purchase insurance online while purchasing other goods or services. However, companies considering this “built-in insurance” model must contend with the complex and sometimes confusing world of state insurance regulations in the US.

As we’ve written about here before, companies looking to enter the highly regulated insurance space need to be aware of some key regulatory issues. This article provides an overview of perhaps the most fundamental regulatory issue that is essential to understand before launching an embedded insurance offering: licensing.

Licensed insurance producer

In order to sell an embedded insurance product through its website, a company may need to be licensed as an insurance producer. Any person or entity that sells, solicits or negotiates insurance must be licensed as an insurance producer (“producer” is a general term for an agent or broker) or qualify for an exemption from such licensing requirements. Licensing is required in each state in which the insurance products are offered and for each type (or “line”) of insurance offered. When activities are conducted online, this usually means that a license is required in all US jurisdictions.

When obtaining an insurance producer license, a company must consider certain state-specific requirements related to corporate structure, name approval, qualification by the Secretary of State, address, and designation of certain individuals as officers. Most importantly, even if the licensed entity will sell the insurance through an online platform without using separate agents to interact with consumers, such entity will still need to identify at least one natural person, known as the Designated Responsible Licensed Producer (DRLP), to to be responsible for the manufacturer’s compliance with all state insurance laws and regulations.

Managing General Agency

Instead of simply selling insurance to its customers, an embedded insurance provider may decide to operate as a managing general agency (MGA) to have more control over the pricing and design of its embedded insurance products. MGAs are licensed insurance producers who have been delegated authority by their carrier partners to write insurance policies and, in certain cases, pay claims. The MGA model could make sense for embedded insurance providers with access to customer data, which would allow them to underwrite and price insurance policies more cost-effectively and efficiently than the insurance companies they partner with.

It is important to note here that although an MGA is often colloquially referred to in the industry as any insurance producer that also has the authority to underwrite insurance, state insurance laws have specific criteria for what constitutes an MGA and the regulatory obligations that apply when such criteria have met. Therefore, one must analyze whether the ‘MGA’ type model is indeed a true MGA, from the point of view of law, to ascertain the applicable regulatory and licensing regime.

Marketing partnership

Instead of becoming a licensed producer itself, a company that wants to build insurance into its platform may decide to host a third-party licensed producer. In this scenario, the company will only provide the platform through which the licensed third-party insurance producer can sell its insurance products, similar to a company hosting a banner ad on its website.

If a company decides to go this route, the company will face legal restrictions on how it can market the insurance offerings, as well as how it can be compensated. Whether licensed as an insurance producer or not, a company will still need to partner with an adequately licensed (or “authorized”) insurance carrier to underwrite the policies.

SaaS partnership

Although a company may wish to be licensed as an insurance producer to offer the embedded insurance product on its platform, it may still decide to partner with an insurance company to provide the technology needed to support the embedded insurance product. In such cases, the company will partner directly with the insurance carrier to sell insurance on behalf of the carrier as their agent or broker in exchange for a commission, but will also partner with an insurance technology provider to develop and maintain the SaaS infrastructure and API , required to manage the offer. This option can make sense if a company wants to obtain a full license themselves, but lacks the technological know-how needed to offer a seamless embedded insurance offering on its platform.

Full insurance carrier

While the options discussed above remain the most common in the built-in insurance model, companies may also offer built-in insurance as “full package” insurance companies. Like the insurance producer, the insurance carrier must, subject to certain exceptions outside the scope of this article (eg, on a surplus lines basis), be licensed or “authorized” in each state in which the insurance policies are placed.

To be licensed as an insurance carrier, a company will need to disclose extensive financial and personal information to its local regulator, raise significant amounts of capital, and comply with state spice requirements, which require a foreign insurance company to operate satisfactorily in another jurisdiction for minimum period of time before being authorized to do business in this state. Despite the significant capital and regulatory hurdles to becoming a “full package” insurance company, a company may decide to become licensed as an insurance carrier to exercise greater control over its business while covering more of the value chain .

Other alternatives

There are other “intermediate” steps that a company can consider before owning a full insurer. For example, a company may decide to acquire a relatively small percentage of an existing shell insurance company in partnership with other unrelated investors. Such investors may later, subject to all applicable regulatory approval requirements, acquire greater ownership of the insurer.

Alternatively, a company may decide to set up an “underwriter” which has less stringent regulatory requirements than a full package carrier, but will generally still require the use of an authorized third-party “fronting” carrier. to provide direct coverage under which the captive will then provide reinsurance capacity.

While companies looking to build insurance into their platforms must deal with various insurance regulatory issues on an ongoing basis after launch, determining what license(s) to obtain – and what that means in practice – is a necessary first step .

Heidi Lawson is the Global Chair of Cooley’s Insurance Practice Group and is a sought-after attorney for her international perspective and in-depth knowledge of the insurance industry. Over the course of her career, she has gained extensive experience representing clients in a wide range of legal activities focused on insurance and financial services. Heidi’s current practice covers both transactional and litigation matters, including regulatory and enforcement actions.

Alexander Traum is special counsel at Cooley whose practice focuses on representing insurance and reinsurance companies, insurance companies, insurance-related services companies and other financial services entities in a variety of insurance regulatory and transactional matters. He writes extensively on insurance-related issues, particularly regarding new technologies and the sharing economy.

Michael Coburn is an associate at Cooley and focuses his practice on advising insurance, fintech, insurance and reinsurance companies, venture capital firms and other financial services companies on a wide range of regulatory and transactional matters. He has extensive experience in the insurance space, including advising on the establishment and licensing of insurance start-ups.

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