While McCarran set up a regulatory framework for monitoring agent behavior, the introduction of mandatory insurance for automobile liability in the late 1940s gave regulators much more to regulate. Prior to this time, the purchase of automobile insurance was a voluntary act by the car owner. As automobile ownership expanded in the heady times after World War II, states passed financial responsibility laws that required all car owners to have a liability insurance policy.

Market conduct

Once those laws were passed "in the interest of public safety," they became the rationale for regulation "in the public interest." Insurance regulation that is "in the public interest" fell under the regulatory rubric of market conduct, which expanded the scope of market conduct well beyond the mere regulation of agents. Now the states had the authority to regulate advertising, policy wording, policyholder service, claims practices, underwriting, pricing, and so on.

Related: What should you do when a client complains?

Over time, market conduct has become one of the most difficult areas for an insurance company to manage, as it can carry significant financial penalties as well as significant risk to the reputation of an insurance company. Ask any insurance company CEO about compliance and it will be one of the top two or three key business requirements for that organization.

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Agent licensing and management

The licensing of agents, which initially was relatively easy to understand and to administer, has become a significant administrative burden to most insurance organizations. Thirty years ago, all one had to do to obtain an insurance license was to take an examination on the rules and regulations of insurance, and a corresponding exam on the type of insurance (life, health, or P&C) that the applicant was attempting to sell and service. A few days after that, there was a newly minted insurance agent.

Related: Insurance carrier compliance: the rise of the chief risk officer

Insurance products are now quite complex; thus, insurance companies need exacting procedures to vet a potential agent and ensure that he or she can fully represent their insurance products to the public. As with many other businesses, ease in navigating carriers' compliance processes has become a competitive differentiator.

There's an old maxim in the U.S. Army that generals don't run the Army, sergeants do. In an insurance agency, it isn't the producers or the principals who run the business, it's the working supervisors and Customer Service Representatives (CSRs) who have the key vote in determining the ease of working with a particular carrier. And nowhere is ease of doing business more evident than in agent management and compliance.

Take, for example, something that is done on a fairly regular basis in most insurance agencies, especially those that are a little larger than average. Let's say an agency represents 10 carriers — some that are "the best" and some that are "not quite as good, but okay," and a remaining few specialize in certain types of business. If that agency were to bring on two new CSRs that need to be appointed with the agency's carriers, it would need to collect all the pertinent license information from the producer's database.

In most instances, the onboarding process is conducted by snail mail, or at best by email.  Forms are completed and transmitted, and after several days in process, probably with a few phone calls in between, that CSR can be appointed. Keep in mind that if there are 10 carriers, this step in the process must be done 10 times.

Modernized onboarding

If a carrier has a modernized onboarding process, then the process can be accomplished simply by calling up the carrier's system, inputting the relevant information on the new CSR, and transmitting that information to the carrier. For an agency confronted with a carrier who does not support easy onboarding, the agency is stuck with the old laborious process, due to a carrier's lack of technology. As a result, that carrier isn't one that will be selected as easy to do business with.

Carriers view the onboarding process as the beginning of compliance, which is an ongoing process as new appointments are made, continuing education is completed, licenses are renewed, and so on. While it may seem that this aspect of compliance is necessary but not all that important, consider that of all the fines levied by insurance regulators in a given year, most will be due to issues with agent licensing.

In the final part of this series, we'll look at how the increasing complexity of agent management and compliance has led to the need for industrywide process management.

John Sarich is vice president of corporate strategy for Fort Lauderdale-based VUE Software. Email him at [email protected] or contact him via Twitter @SarichJohn or on LinkedIn.