Monday, January 9, 2012

Getting a License to Sell Insurance in Texas

Given the CFS mission to help ensure that working-class Americans have access to financial tools and advice – including agents who represent a vital link to products like IRAs and life insurance, CFS has done a fair amount of work on how financial professionals are licensed and get into the business. That work has uncovered instances where the evidence suggests that state licensing requirements, particularly licensing exams, may be serving as an unfair and unnecessary barrier to entry into the profession - - to the detriment of consumers. After all while licensing is important and meant to protect consumers, consumers are not protected if the pool of professionals on which they can rely is artificially limited.

The state of Texas recently released a report detailing outcomes related to its life insurance licensing exam. The results are puzzling.

Overall, the report shows candidates for a life insurance license in Texas doing significantly worse on the exam than their counterparts in neighboring states like New Mexico, Kansas and Arkansas. Why? The subject tested is supposed to be essentially the same – entry-level insurance knowledge. Are candidates in Arkansas where the exam pass rate is 76 percent smarter than candidates in Texas where the pass rate is 55 percent? Unlikely. Though the profession is the same and the laws similar, the test is obviously different in Texas. Why?

In addition to an overall low level of success, the Texas report also showed the exam has a disparate impact that is consistent across education levels.

Some might suggest the Texas results can be attributed to some candidates better preparing for the exam or socio-economic variables. Certainly those two things have an impact. They do not, however, fully explain why Texas candidates do worse than their neighbors on an exam for the same job. Also, the Texas report shows that those who take courses to study the exam do only marginally better than those who do not (58 percent to 44 percent). So how important is preparation?

The Texas report is particularly puzzling in light of the fact that an alternative exam and method of exam administration exists that has less disparate impact and is presumably equally protective of consumers. That exam is used by Illinois, which has a history of dealing with issues in licensing exams.

Compare the Texas education/ethnicity chart above to this one below showing pass rates by ethnicity from 1985-2010 in Illinois:

Why don't Texans deserve the same?

At its launch, CFS released a survey with the League of United Latin American Citizens (LULAC) that highlighted some of the sources of financial insecurity among middle-class and minority communities. The poll revealed a very serious knowledge gap among Americans who had the finances to save and but did not. For example, 89 percent of those CFS surveyed who did not have life insurance or an IRA did not know anyone who sells the product. Eighty percent of this group had never been contacted about it.

CFS’s own research is mirrored by the consumer research of LIMRA and others, which consistently show middle-class Americans in search of professional financial advice. For example, LIMRA’s 2010 survey of the life market found that “almost eight in 10 U.S. households currently do not have a personal life insurance agent or broker to turn to and most of them say they never did.”

With life insurance usage so low, and Americans searching for individuals to talk to, will public policy makers listen?

Obviously, the answer is not to make the Texas and other exams easier or loosen consumer protections. The answer is to make sure the process is fair. As long as candidates for a license in states like Illinois and others have a much smoother pathway into the profession than candidates in states like Texas, questions of fairness will continue to linger - - and consumers will continue to suffer the consequences.