Agents for Change: Competitive reforms for producer licensing
As numerous studies have demonstrated, there is little evidence this growing mountain of red tape has actually helped to protect the public, but significant research finding it has meant diminished opportunities for workers and entrepreneurs and mounting costs for consumers. A 2015 study by the Heritage Foundation put the annual cost to consumers of occupational-licensing regimes at $127 billion, while a 2011 paper from the W.E. Upjohn Institute for Employment Research put the figure as high as $203 billion.
Even the Obama administration agrees there’s a problem. A July 2015 joint report of the U.S. Treasury Department, the U.S. Labor Department and the White House Council of Economic Advisers reviewed a cohort of studies on the effects of occupational licensing, finding that nine of the 11 surveys associated more stringent licensing requirements with “significantly higher prices.” The White House estimates licensing laws raise the cost of goods and services by between 3 and 16 percent and finds that unlicensed workers earn 10 to 15 less than comparable licensed workers.
While there are now more than 1,100 job descriptions for which at least one state requires an occupational license, the Treasury report finds that fewer than 60 jobs are required to be licensed in all 50 states. One of those occupations is that of insurance producer, the term used in most state codes for agents and brokers licensed to market and, in some cases, bind insurance policies.
Though this ubiquity might be seen as prima facie evidence of the need to restrict insurance sales to licensed producers, it bears noting that analysis by the Reason Foundation finds a number of “outrageous” licensing requirements are similarly common. For example, all 50 states require licenses for barbers and cosmetologists and for hearing aid fitters and dispensers; most states require licenses for athletic trainers and dieticians; and several states require licenses for professions as mundane as auctioneers, casket sellers, hair braiders, interior designers and sanitarians.
As a 2013 report from the Congressional Research Service describes the current insurance licensing landscape:
In addition to the costs that might result from the specific aspects of the insurance licensing system, any professional licensing regime acts as a barrier to entry for those who might be interested in providing services that require a license. Economic theory suggests that such barriers increase consumer costs to some degree and have the potential to be used as a protectionist measure to prevent competition, allowing license-holders to extract economic rents from consumers. Whether or not the public benefits resulting from licensure outweigh the costs is a decision to be evaluated on a case-by-case basis by public policymakers.
Determining the merits of abolishing insurance producer licensing altogether would require thorough analysis of the relative costs and benefits of licensing regimes, which is beyond the scope of this paper. However, there have over the years been a variety of proposals to loosen licensing requirements and to liberalize rules governing sales practices in ways that unquestionably would promote greater competition. This paper offers a brief review and summary of some of the more notable ideas for reform.
Historically, such proposals have faced opposition from insurance producers and their trade associations, who have been able to exert outsized influence with lawmakers and regulators. But recent shifts in the marketplace and in the law may change how such debates will play out in the future. Among those shifts is simply that the market share enjoyed by agents and brokers has been shrinking over time – a reality that likely will eventually have consequences for the community’s relative influence on policy. According to a 2016 Harris Poll, 22 percent of respondents prefer to purchase insurance online; another 38 percent say they currently compare prices online before purchasing through an agent, a practice known as “showrooming.”
Whereas the independent agency channel accounted for the overwhelming majority of auto and home insurance sales a half-century ago, direct writers today account for 73 percent and 69 percent, respectively. Even in the area of life insurance, where most consumers still prefer to buy face-to-face from a financial professional, a 2011 survey by the life insurance marketing agency LIMRA found the number preferring to buy from an agent has fallen to 64 percent, from 80 percent in 1996, with 26 percent of consumers saying they now prefer to purchase life insurance by phone or over the internet.
Also noteworthy has been the general support seen from the agent community in recent years for two pieces of federal legislation which served to loosen licensing rules significantly. In 2010, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress passed the Nonadmitted and Reinsurance Reform Act, which sought to resolve conflicting state laws around the placement of multistate surplus lines risks. The measure was passed with strong support from the Council of Insurance Agents & Brokers and the National Association of Professional Surplus Lines Offices.
Perhaps even more significant was the 2015 legislation to create the National Association of Registered Agents and Brokers, intended to create reciprocity across state lines in producer licensing. The Independent Insurance Agents & Brokers of America, which had resisted a similar proposal in the 1990s, was now unequivocal in their support, praising the measure on grounds that it would “help policyholders by permitting greater competition among agents and brokers … promote greater consistency in agent and agency licensing, ease the burden that many agents face in doing business across state lines, and increase consumer choice.”
More recently, new entrants to the market have challenged longstanding anticompetitive rules like state regulations that prohibit agents and brokers from offering rebates to their customers. Though the final disposition of these disputes is not yet known, they highlight an opportunity for policymakers to reconsider past proposals to loosen licensing requirements and foster more competitive markets that better serve consumers.
Image by nito