Why Does the Securities Market Matter to Insurance Professionals?

This post is part of a series sponsored by AgentSync.

Securities, like insurance products, are highly regulated to protect consumers and the health of the economic system as a whole. Learn why securities matter to insurance professionals, even if you’re not a dually licensed insurance and securities broker.

If you’re selling straightforward insurance, like auto, home, or workers compensation insurance, it may not occur to you that there’s a deep connection between insurance products and the securities market. Securities, consisting most commonly of stocks, bonds, and mutual funds, might seem like a whole other world.

In reality, there’s a lot of overlap between these financial instruments and some of the most common insurance products that carriers, agencies, and MGAs/MGUs deal with daily. How so? Some insurance products, like variable life insurance, registered index-linked annuities, and variable annuities contain an investment component. It simply wouldn’t be possible for a life insurance company to pay out millions of dollars – often far more than they take in through premiums alone – if they didn’t have a way to grow that money over time.

If you have a basic understanding of the banking system, you know that banks take the money customers deposit and invest it elsewhere during the period it’d otherwise just be sitting in a customer’s account. Sometimes, the bank pays customers a little bit of interest, but there’s no risk that the bank’s investment strategy will cause a customer to lose money that should’ve been in their account.

(Caveat: Extenuating circumstances aside, and assuming the bank account is FDIC insured and under the FDIC per-account limit.)

Insurance solvency refers to an insurance carrier’s ability to pay out any claims it’s obligated to pay to policyholders. Most, if not all, types of insurance rely on the insurance carrier investing premiums to grow their money so they’ll have funds to cover future claims. While an insurance carrier may take premium dollars and invest them into all kinds of securities markets, an agent selling auto insurance doesn’t need a securities license because the policyholder bears no risk based on the success or failure of the auto carrier’s investments. As long as an insurer remains solvent (and there are state and federal safeguards in place to mostly make sure this is the case), the policyholder doesn’t need to worry about what the insurer is investing in or how those investments are performing.

In variable lines of insurance, the policyholder’s return is directly tied to the securities the insurance carrier invests in. This means there’s the potential for a much larger return over time if the market does well, or a very poor return (or even a loss) if it doesn’t.

With products like variable annuities or variable life contracts, when a customer purchases a policy and pays premiums, the insurance carrier puts those premiums into investments that they expect to pay off over the long term. Unlike a simple checking or savings account, security-backed insurance policies include a real risk that customers can lose money, or not gain as much as they hoped, if the market takes a hit. For insurance products that include this level of risk, it’s particularly important that insurance agents are properly licensed in both insurance and securities so they can educate and advise their clients sufficiently.

The most commonly sold types of security-backed insurance products include variable life insurance, variable annuities, registered index-linked annuities, and indexed universal life insurance. There are plenty of securities that don’t intersect with life insurance and annuities; most are sold by brokers who have securities licenses and not insurance licenses.

Where brokers need to be dually licensed in insurance and securities is in instances where they’re selling or advising clients on these variable types of insurance, which, again, include some degree of market risk not present in typical insurance products.

As with all types of insurance, anyone who sells or solicits policies has to be licensed in their resident state and in all other states where they do business. In addition to these state-by-state insurance licenses, brokers who work with variable lines of insurance also need to get their FINRA licenses (either a Series 6 or Series 7) and may have to register with individual state securities regulators.

If state-by-state insurance compliance wasn’t tricky enough, adding in the federal layer governed by the Financial Industry Regulatory Authority (FINRA) means there are even more moving parts and places for compliance to trip you up.

We’ve done a deeper dive into all the different types of licenses and combinations thereof here.

Just like selling insurance without an insurance license, selling security-backed insurance without the proper securities license can spell disaster for the broker and customer, alike. To stay far, far away from hot water, it’s best for any insurance agent or producer who might find themself in the position of discussing securities with clients to pursue dual licensing.

We often talk about how complex it is to keep up with insurance producer licensing when regulations and licensing requirements vary across the U.S. states and territories. For insurance agents who also sell variable lines of insurance, which requires a securities license, the task of ensuring each broker is in full compliance for every line of business across all jurisdictions can be brain-scrambling.

If you’re looking for a better way to streamline and automate producer onboarding and license compliance management, particularly if you’re dealing with dually licensed insurance and security brokers, check out a demo of AgentSync.