Certified Financial Consultant (CFC) Practice Exam

What must an insurer obtain to legally transact insurance in a state?

1. License from the federal government

2. Certificate of Authority

3. Approval from the state insurance department

4. Insurance agent certification

The correct answer is: Certificate of Authority

For an insurer to legally transact insurance in a state, it must obtain a Certificate of Authority. This certificate is a formal approval granted by the state’s insurance department, indicating that the insurer has met the regulatory requirements to conduct business within that state. It ensures that the company is financially stable and compliant with state regulations, providing a level of protection to policyholders. The focus on obtaining this certificate underscores the importance of regulatory oversight in the insurance industry. It helps establish the credibility and capability of the insurer to operate within the jurisdiction, ensuring that they follow state-specific laws and provide the necessary consumer protections. Other options, such as a license from the federal government or approval from the state insurance department, are not the correct mechanisms for authorization. While insurers must comply with federal regulations, insurance is primarily regulated at the state level, and the Certificate of Authority specifically validates their right to transact business within that state. Insurance agent certification is also different; it pertains to the individual individuals selling insurance products, not the insurer itself.