Marketplace & Regulation
For years, Florida was unique in that it did not require insurance agencies to obtain a license prior conducting insurance business. The federal Financial Services Modernization Act of 1999 required states to implement standardized licensing procedures to foster reciprocity of agent and agency licenses between states. As a response to that Act, Florida now requires insurance agencies to be licensed. An agency is defined as a location from which insurance business is transacted. Typically it is the business office of an agent, but it also could be the agent’s home if business is solicited from there. An agency may involve many agents transacting insurance business at that location or it might be a one-agent office. Agencies may be organized as a sole proprietor, a partnership, corporation or other business entity acting under its own name or a trade name.
Effective October 1, 2006, agencies must be either licensed or registered in Florida. The licensing process requires an agency to submit an application. The application discloses the name of the agency, the owners or officers of the agency and their residential addresses, the location of each office that transacts insurance business, and the name of a full-time agent who supervises each location. The agency must also file the fingerprints of the all owners/partners/officers/directors with the Department (if those fingerprints are not already on file). The president and secretary of the corporation sign applications on behalf of incorporated agencies; in the case of unincorporated agencies the owner or partners sign the application.
Some agencies may be registered, instead of licensed. Agencies in existence prior to 2003 that are completely owned by Florida-licensed insurance agents may choose to register instead of apply for licensing. (Branch offices of broker-dealers in existence before 2003 that are subject to FINRA regulation may also choose to register.) The application for registration is the same as for licensing, but fingerprints are not required as part of the process. Whereas an agency license must be renewed periodically, registration is perpetual (unless the agency or its owners/officers commit violations of the Insurance Code). An agency license provides Florida agencies with reciprocity for licensing in other states; registration does not. If a registered agency no longer qualifies for registration, it must become licensed. For example, if one of the owners of the registered agency is no longer licensed as an agent in Florida, or one of the owners violates the Insurance Code, the agency must become licensed.
The penalty for failing to apply for agency licensing is $10,000; the penalty is $5,000 in the case of registration. Unlicensed or unregistered agencies may not transact insurance business in Florida, and insurance companies cannot pay commissions to unlicensed or unregistered agencies. Licensed or registered insurance agencies may split their commissions with licensed agents in the office. Agencies may not pay fees or other compensation to an unlicensed person for referrals if that fee is dependent on the referral purchasing an insurance product. Each agency must prominently display its license or registration so that it is clearly visible to the public. Violations of the agency law are third-degree felonies – and may result in the revocation or suspension of the agency license. During an agency’s suspension or revocation the Department may also suspend or revoke the license or registration of other agencies under the same management, ownership or control. New licenses will not be granted to agencies having similar management, ownership or control as a suspended or revoked agency.
[There are some inconsistencies and ambiguity in this new law. It may be subject to revision in upcoming Legislative sessions. Agents should keep abreast of any changes.]
The marketplace for annuities has expanded as insurance companies developed new distribution channels. The federal Financial Modernization Act reduced barriers between insurance companies and other financial institutions. And as a result of two U.S. Supreme Court decisions, banks and other financial institutions are allowed to sell all types of insurance anywhere in the state. The case of NationsBank of North Carolina v. Variable Annuity Life Insurance Co. permitted the sale of annuities by banks. The case of Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner permitted the sale of all other lines of insurance. Agents affiliated with or employed by financial institutions are allowed to solicit and market all types of insurance subject to specified consumer protections and disclosures required by state law.
Florida law requires that financial institutions conduct insurance transactions only through Florida-licensed insurance agents representing Florida-authorized insurers. Agents who are employees or affiliated with financial institutions are licensed and regulated the same as any other agent.
Florida law also imposes additional consumer protections when financial institutions sell insurance — specifically the law:
¨ Prohibits the rejection of an insurance policy required in connection with a loan because an agent unaffiliated with the bank sold it.
¨ Prohibits the imposition of extra charges on insurance policies purchased from unaffiliated agents required in connection with a loan.
¨ Prohibits misrepresentations regarding the insured or guaranteed status of any insurance product.
¨ Prohibits the release of insurance information to third parties without the express consent of the consumer; or unless the consumer has been given clearly and conspicuously in writing the opportunity to object to such use of the information.
¨ Prohibits tying insurance products to loan arrangements and restricts a loan officer from selling insurance for a loan in which the same loan officer is involved in the application, solicitation or closing of the loan.
¨ Requires the disclosure, prior to any insurance sale, that insurance products are a deposit; not insured by the FDIC; not guaranteed by the financial institution or its subsidiaries or affiliates; and where appropriate, involves investment risk, including loss of principal.
¨ Requires the disclosure, when insurance is mandated in connection with a loan, that the purchase of insurance from an agent who is unaffiliated with the bank does not affect the loan decisions or the credit terms in any way.
¨ Requires the completion of credit and insurance transactions through separate documents.
¨ Prohibits the inclusion of insurance premiums in a credit transaction without the express consent of the customer.
¨ Prohibits the use of the name or logo of a financial institution or its affiliates or subsidiaries when marketing or soliciting existing or prospective customers if such marketing materials are used without the written consent of the financial institution and in a manner that would lead a reasonable person to believe that the material or solicitation originated from, was endorsed by or is related to the financial institution.
Annuity Disclosure Procedures
Variable annuities originated as a supplement to fixed dollar annuities. Fixed annuities provide safety of principal but are subject to inflation risk. Variable annuities provide a hedge from inflation but are subject to investment risk. The two types of annuities complement each other. When soliciting variable annuities, Florida agents must inquire as to the prospect’s sources of income. The purpose of this inquiry is to call attention to the client’s overall financial situation. It does not require or prohibit any other action on the part of the agent or prospect. The agent must simply ask the question.
Variable insurance products – variable annuities, variable life, and variable universal life – are treated as securities under federal securities laws. A “prospectus” must accompany sales presentations of these products. This document is prepared and furnished by the insurance company and reviewed by the SEC. A prospectus contains information about the nature and purpose of the insurance or annuity plan, the separate account and the risk involved. It is a primary source of information for the prospect. All other materials, such as direct mail letters, brochures and advertising variable products also must have prior approval by the SEC.
Buyers’ Guide and Contract Summary
Under Florida's General Solicitation Law, a Buyer’s Guide and a Contract Summary must accompany the sale of all types of annuities. The Buyer's Guide is a generic brochure designed to provide consumers with basic information regarding the purchase of insurance and annuities. The Contract Summary will summarize the details of the annuity contract, set forth in a format consistent with NAIC guidelines. The Contract Summary will contain information on the specific type of contract and any applicable riders, premiums, dividends, benefit amounts, cash surrender values, charges and fees, etc.
Situations will arise in which a client will wish to replace or exchange an existing contract for a new one offered by the agent. While replacement is a legitimate activity, there have been problems in the past with agents who encourage contract exchanges as a way to generate commissions for themselves. Agents and insurers must make several disclosures whenever an existing policy or contract will lapse or be significantly reduced in value.
Florida's disclosure requirements, as well as those required by other regulators, will be discussed in greater detail in Chapter 6.