I subscribe to the Academy of Insurance and find its webinars on insurance coverage enlightening. Patrick Wraight, director of Insurance Journal’s Academy of Insurance, recently asked the National Association of Insurance and Financial Advisors a question about how supporting the removal of California’s prelicensing education fits with an organization’s commitment to education and professional competence. I agree with the concern behind his open letter. Insurance is difficult to understand, and the consequences of inadequate advice can remain hidden until a policyholder suffers a devastating loss.

California’s AB 943 took effect this year. It eliminated the mandatory 20 hours of line-specific prelicensing education for affected insurance producer licenses. The licensing examination remains, along with 12 hours of ethics and California Insurance Code instruction. The preparation courses may still be offered voluntarily, but the Department no longer reviews and approves those affected line-specific courses.

NAIFA–California and the Association of California Life and Health Insurance Companies co-sponsored the legislation. It celebrated the passage, calling the legislation “a major win for the industry and aspiring professionals.” The question Wraight raises is whether policyholders won anything.

The rationale for the new law and lowered standards is that the previous law imposed time and financial burdens, particularly on applicants with limited resources or competing responsibilities. Removing it could broaden recruitment, promote economic mobility, and increase the insurance agent workforce. Supporters also relied on arguments that compulsory coursework does not improve examination performance and that many other states operate without it. Wraight asked whether the law lowers the bar, allowing more incompetent licensees to sell insurance.

A capable applicant might learn more effectively through independent study than through a prescribed course. Sitting in front of a computer for twenty hours does not magically turn someone into a competent insurance professional. I have attended enough educational programs to know that attendance and learning are different accomplishments.

NAIFA claims that pre-licensing mandates do not improve examination pass rates or consumer outcomes. I am not certain how it determines successful consumer outcomes.

To me, the questions are practical. Can the newly licensed producer recognize that a homeowner needs more ordinance-or-law coverage? Explain how a roof settlement endorsement changes the payment after a storm? Identify a business-income exposure before recommending limits? These are the kinds of practical questions I would want answered before celebrating the removal of substantive instruction.

A sound licensing examination provides meaningful evidence of knowledge. Wraight’s argument does not require dismissing examinations as mere exercises in test taking. It requires asking whether the existing examination adequately measures the judgment consumers need from the people advising them.

The bottom line is that California made substantive insurance agent education optional without presenting persuasive evidence that the remaining licensing safeguards adequately measure the competence consumers need. My view is a narrower statement than saying repeal has already caused worse advice. It is also a serious criticism of the justification offered for the change.

Most policyholders, commercial and personal, have no way to recognize an agent’s knowledge gap. The customer seeking guidance usually knows far less about the insurance policy coverages and how they work than the person selling it. An omitted endorsement or inadequate limit may look perfectly acceptable until a fire, windstorm, or whatever catastrophe exposes the problem. By then, the opportunity to purchase the right protection may be gone.

I also question the suggestion that adding more producers helps solve California’s insurance crisis. More capable advisors could help consumers navigate a difficult market. But additional licenses do not themselves create underwriting capacity, make an insurer willing to cover a home, or ensure that the advice given is sound. Indeed, it could add to the problem by allowing more incompetent insurance advisors.

Was this cost cutting by the insurance industry? Reducing the expense and time required to enter the business was expressly part of the rationale. That can benefit applicants and the insurance organizations recruiting them. I would not claim that the sponsors secretly intended to sacrifice competence. I would ask why reducing those burdens was treated as sufficient reason to remove the requirement without a convincing demonstration that consumers remained adequately protected.

NAIFA’s Codes of Ethics commit members to developing their skills and knowledge through education. Supporting that commitment while opposing a particular mandatory educational course does not seem to align. An organization advocating repeal should explain what makes its preferred system sufficient to protect the people who rely on its members. Invoking ethical professional standards is easier said than measuring whether those standards are being met.

If the curriculum is stale, improve it. If applicants already possess the knowledge, allow them to demonstrate it through a rigorous assessment. Practical coverage exercises, meaningful supervision, and education tied to actual consumer problems all deserve consideration. The goal should be a more capable professional insurance advisor.

Wraight is right to press the issue. I would like to see evidence of procurement errors, substantiated complaints, and new producers’ ability to identify coverage needs. Exam scores belong in that discussion, but they cannot carry the entire argument. While the insurance industry may benefit from the cost reduction, the cost of advice that leaves a business, family, or person inadequately insured can take years to appear.

I have previously written about the benefits of the Academy of Insurance in Learning Business Income and Extra Expense Insurance Through the Insurance Academy, and Deeper Analysis of How to Interpret Insurance Policy Language—Where Insurance Coverage Nerds Go for the Weekend.

Thought For The Day

“If you think education is expensive, try ignorance.”
—Derek Bok