Securities, like insurance products, are heavily regulated in order to safeguard customers and the overall health of the economy. Even if you are not a dually qualified insurance and securities broker, you should understand why securities are important to insurance professionals.
The connection between insurance and securities products.
If you offer simple insurance, such as a car, house, or workers’ compensation, it may not appear to you that there is a close relationship between insurance products and the securities market. Securities, which typically comprise stocks, bonds, and mutual funds, may appear to be a completely different universe.
In actuality, these financial instruments and some of the most prevalent insurance products that carriers, agencies, and MGAs/MGUs deal with on a daily basis have a lot in common. How so? Variable life insurance registered index-linked annuities, and variable annuities are all insurance products that have an investing component. A life insurance company simply couldn’t pay out millions of dollars – typically considerably more than they earn via premiums alone – if they didn’t have a mechanism to increase that money over time.
If you have a rudimentary grasp of the banking system, you know that banks invest money that consumers deposit elsewhere during the time it would otherwise be sitting in a customer’s account. The bank occasionally pays consumers interest, but there is no chance that the bank’s investing plan would lead a customer to lose money that should have been in their account.
Solvency of securities and insurance.
The capacity of an insurance company to pay out any claims owed to policyholders is referred to as its insurance solvency. Most, if not all, forms of insurance rely on the insurance company investing premiums to expand their reserves so they can cover future claims. While an insurance carrier may invest premium monies in a variety of securities markets, an agent selling vehicle insurance does not need a securities license because the policyholder bears no risk as a result of the auto carrier’s investments’ success or failure. As long as an insurer is solvent (and there are state and federal regulations in place to ensure this), the policyholder does not need to be concerned about what the insurer invests in or how those investments perform.
What distinguishes variable lines of insurance?
In variable insurance, the policyholder’s return is directly related to the securities in which the insurance provider invests. This means that there is the possibility of a substantially higher return over time if the market performs well, or a very low return (or even a loss) if it does not.
When a customer obtains a variable annuity or variable life contract and pays premiums, the insurance carrier invests those premiums in investments that they hope to pay out over time. Unlike a basic checking or savings account, security-backed insurance products include the genuine risk that consumers will lose money or gain less than they expected if the market falls. For insurance products with this degree of risk, it is critical that insurance agents be fully licensed in both insurance and securities so that they can adequately educate and advise their clients.
Which insurance products are associated with securities and securities regulation?
Variable life insurance, variable annuities, registered index-linked annuities, and indexed universal life insurance are the most regularly offered forms of security-backed insurance products. There are many securities that have nothing to do with life insurance or annuities; the majority are marketed by brokers who have securities licenses rather than insurance licenses.
Brokers must be dual licensed in insurance and securities when selling or advising customers on these variable forms of insurance, which, once again, entail some degree of market risk not seen in traditional insurance products.
What types of licenses are required for insurance agents and brokers that work with securities?
Anyone who sells or solicits policies, as with other forms of insurance, must be licensed in their home state as well as all other states where they conduct business. Brokers who operate with variable lines of insurance must additionally get FINRA licenses (Series 6 or Series 7) and may be required to register with specific state securities authorities in addition to these state-by-state insurance licenses.
If state-by-state insurance compliance wasn’t complicated enough, adding the federal layer overseen by the Financial Industry Regulatory Authority (FINRA) means there are even more moving pieces and locations for compliance to go wrong.
We’ve gone over all of the different types of licenses and their combinations in depth here.
Is it really necessary to be a dual-licensed broker?
Selling security-backed insurance without the required securities license, like selling insurance without an insurance license, may be disastrous for both the broker and the consumer. To keep out of hot water, any insurance agent or producer who may be in the position of discussing securities with customers should obtain a dual license.
Insurance producer license and variable lines insurance broker licensing are both difficult to get.
We frequently discuss how difficult it is to keep up with insurance producer licensing when legislation and licensing requirements differ between states and territories in the United States. The process of ensuring each broker is in complete compliance with every line of business across all countries may be mind-boggling for insurance brokers who also offer variable lines of insurance, which need a securities license.