A service provider is a company that provides a discrete service or set of services in connection with the business of insurance. Depending on the scope of services provided, the service provider may be subject to regulatory requirements under state insurance laws. For example, service providers whose services relate to the sale, solicitation, negotiation or claims handling of insurance in the United States are more likely to be subject to that regulation.

Advantages of Service Provider Model:

• Greater capacity to focus on core competitive advantages.
• Limited or no regulation by state insurance departments (depending on scope of services).
• Lower cost of entry due to factors such as limited regulation and less need to outsource functions outside of the company’s core competitive advantages.

Disadvantages:

• Involvement limited to services provided, which may limit access to peripheral benefits such as use of data.
• Heavily dependent on the business strategies of its customers.

Key considerations:

Licensing:

Depending on the scope of services provided, a service provider and its staff may be required to be licensed under state insurance laws and subject to ongoing compliance requirements under those laws. Insurance is generally regulated at the state-level, so licensing and ongoing compliance requirements will vary by state. Common license categories include:

• Insurance Producer:

  State insurance laws typically require any person (individual or business entity) that “sells,” “solicits” or “negotiates” insurance to be licensed as an insurance producer or similar licensee (for example, an insurance agent or insurance broker). As a result, a person that engages in any of a wide variety of selling, marketing or negotiating activities regarding insurance policies or annuity contracts is typically subject to licensure as an insurance producer, insurance agent or insurance broker in the relevant states.

• Independent Adjuster:

  Approximately 35 states have a separate license available for independent adjusters. These states’ insurance laws typically require any person that investigates, negotiates or settles claims on certain types of insurance to be licensed as an independent adjuster. However, merely handling claims (without discretionary authority to settle them) is less likely to be an activity requiring an independent adjuster license.

• Third-Party Administrator (TPA):

  In many states, a person that directly or indirectly underwrites, collects charges, collateral or premiums from, and/or adjusts or settles claims on residents of that state regarding certain types of insurance is required to be licensed or registered as a TPA.

Compensation:

A service provider that receives commissions based on insurance sales in connection with the sale, solicitation or negotiation of insurance must be licensed as an insurance producer (or its equivalent). However, in some states, even if a service provider is not involved in the sale, solicitation or negotiation of insurance, payment of commissions based on insurance sales to that service provider requires the service provider to be licensed. So, any proposed compensation to be paid to a service provider that is based on insurance sales should be carefully reviewed for compliance with state insurance laws.

Operational Requirements:

A service provider may become subject to additional operational requirements as a result of providing services to the insurance industry. Regulated entities, such as insurance carriers or insurance producers, may be required under state insurance laws to contractually impose a greater level of operational requirements on their service providers than would typically be the case for entities in other industries. For example, the insurance laws of many states impose specific cybersecurity requirements on insurance licensees, which include requirements to which third-party service providers contracting with the licensees must adhere. So, to comply with these requirements, the licensees may impose stricter cybersecurity requirements on their service providers than would be typically imposed on service providers not servicing the insurance industry.