Insurance 101: What Is an Insurance Agency?

There are many different types of businesses involved in the insurance industry, many of which are subject to regulatory scrutiny for components of their business such as policies, payment, and procedure. One of these business types is the so-called “insurance agency.” But in a world of so many acronym-studded business types—such as FMOs, IMOs, NMOs, MGAs, and more—it can be difficult to clearly understand the role of an insurance agency within the broader insurance distribution channel. Particularly since there is a regulatory factor that comes into play in the world of insurance, it’s critical for carriers and agencies to understand business types and their respective regulatory compliance requirements. 

We’re going to review what one of these business types is, and what it does. Our focus today is on the insurance agency. 

Before we dive into the existential questions of agencies, business entities, and regulation, please remember that this blog is neither comprehensive nor is it terribly authoritative.Most importantly, it’s NOT your in-house legal counsel. So, if you have questions about what regulations apply to you and your business,finding the concrete answers is going to be the work of your lawyer and/or state regulator.

What is the definition of an insurance agency?

Simply put, an insurance agency is a type of business entity that sells insurance policies on behalf of insurance carriers. Some of an agency’s core responsibilities include:

• Selling policies from one or more insurance carriers  
• Managing clients’ existing policies 
• Keeping appropriate licensing, compliance, and continuing education requirements up to date and properly recorded 

In the world of insurance law, the terms “business entity” and “insurance agency” are used interchangeably, so we will do the same for the purposes of this article. 

Bear with me, and we’ll make sense of the jargon together.

Regulating agencies—legal definitions and licensure

 The National Association of Insurance Commissioner’s internal documentation contains a solid page’s worth of discussion notes over what state insurance regulators consider a “business entity.” In other words, what should be a straightforward definition is actually the subject of a lot of debate. Is an insurance agency an organization that’s assigned commissions? Is it licensed? Is it anyone or anything that is helping a producer sell insurance?

As is so often the case in the insurance industry, part of the discussion varies widely by state. The nuances of regulation particular to insurance agencies are quite different, whether you’re looking at licenses, appointments, affiliations, Designated Responsible Licensed Persons (DRLPs), etc.

So while the definition may still be contested in some circles, let’s focus on what we need to know for compliance and regulatory reasons. Broadly speaking, as far as regulations are concerned, a business entity should be licensed (in the states that require insurance agencies to get licenses) or should be viewed as an agency when they 

1. have employees or contracted workers who are producers, or are benefitting from assigned commissions from insurance producers and
2. are involved in the sale, negotiation, or solicitation of insurance and
3. are not insurance carriers or adjusters

Essentially, if a business entity is gathering producers and has an incentive to help them sell insurance, then it’s an insurance agency and will need to follow appropriate state licensure requirements.

This is also a reason we’ve seen warnings such as those issued by former Commissioner Jim Donelon of Louisiana to insurance-adjacent industries like banking or real estate, where those who refer business to insurance agents are crossing a line into solicitation or negotiation. If those professionals or entities are straying too far into the insurance lane, they’ll be regulated (i.e. penalized) like a non-licensed agency. 

What is a common structure of an insurance agency?

An insurance agency could have a wide variety of structures. To give you an idea of what this looks like, West Virginia’s guidance on insurance agencies says:

“Insurance agency” means an individual, corporation, partnership, association, limited liability company, or other legal entity except for an employee of the individual, corporation, partnership, association, limited liability company, or other legal entity, and other than an insurer or an adjuster as defined by section twelve-b [§ 33-1-12b], article one of this chapter, which employs individuals licensed to engage in activity or whose members engage in any activity be performed only by a licensed individual insurance producer or solicitor. It shall not include sole proprietor or partnerships in which there is only one licensed insurance producer.”

This is common across many states insofar as:

1. Just about any structure or kind of company can be an agency but
2. Even a lot of states that require agencies to have a license do not recognize sole proprietorships as agencies unless there are multiple insurance producers in the shop

DRLPs, affiliations, and agencies 

As we’ve covered elsewhere, states require insurance agencies to report a designated responsible licensed person, sometimes called a designated responsible licensed producer or designated responsible person, who usually has to be:

• An officer, director, or partner in the business
• Licensed in the line(s) of authority the business is transacting
• Affiliated with that particular agency 

In states that don’t require or allow agencies to have their own insurance license, the DRLP license is typically considered synonymous with the agency’s ability to write business. If the DRLP loses their license, the ability of the agency and its producers to keep selling is in jeopardy.

In some states, DRLPs are the only producers who are required to have an agency affiliation. In others, states require agencies to report all of the agencies who are writing on their contracts and who are using their agency relationship to secure carrier appointments.

Affiliations are also difficult to maintain because most states either require agencies to keep an internal record, or to report affiliated producers via individual or state portals, so there aren’t options for a central, bulk reporting capability such as NIPR (the National Insurance Producer Registry). So, many insurance agencies maintain their affiliations internally with a spreadsheet, or in their insurance producer compliance software (like AgentSync 😉).

What are appointments for business entities?

Like regulations around affiliations, appointment regulations vary state to state, and that goes double for agency-specific appointment requirements. Some states require business entities to be appointed by the carrier, and it doesn’t matter whether the business entities’ producers are appointed or not. Others require individual producer appointments but don’t allow for business entity appointments. And then some require every person, business entity, or walking logo to have an appointment if they plan to sneeze on an insurance contract and get paid.

How are branch offices regulated?

Branch office regulations add yet another facet to the existential agency question, because some states require each branch of an office to be treated as though it is an agency in its own right, with separate licensing, affiliation records, appointments, and contracts. Other states, like Texas, have moved to treating the agency as getting a one-per-state designation and rolling up all of the agency’s other branches underneath that designation for reporting purposes. 

Why is insurance agency compliance so complex?

Managing insurance agency compliance across multiple states requires tracking:

• Producer licensing and renewals
• Carrier appointments and affiliations
• State-specific insurance regulations

Automated compliance software can help manage insurance at scale

Because state regulations vary so much, and are so impactful on the definitions and requirements for agency-based rules, it can be difficult to keep straight where any given business lies in a distribution pipeline. Clear, organized digital records can really help to make sense of the mess, and insurance business entities that use automated compliance software can keep records and licensing information clear and accessible at scale. Modern insurance compliance technology platforms like AgentSync help carriers and agencies:

• Automate licensing and onboarding workflows
• Maintain real-time compliance visibility
• Reduce risk in insurance distribution operations

If you’re ready to get some clarity on your distribution partners—regardless of jurisdiction—and ensure fullstack compliance per your state insurance regulations, contact us to request your demo today.