NY Insurance Regulator Faces Head-on Tough Industry Issues

Eric Dinallo, New York’s Insurance Superintendent, has unveiled two proposals the past several weeks that has the industry a buzz. His first proposal involves a plan to reduce alien reinsurance collateral requirements; his other proposal is to overhaul the way insurance is regulated.   
  
The Property Casualty Insurance Association of America opposes his collateral plan and has called it “premature” in light of the fact that the NAIC Reinsurance Task Force has been actively working on the issue.  
  
Dinallo’s move comes eight years after the NAIC began debating the merits of collateral requirements. Additionally, the superintendent argues these are difficult times for his constituents -- many of whom are facing catastrophic risk. This includes Long Island, NY, which is threatened by hurricanes, and Manhattan, a tried-and-tested terrorism target.   
  
According to Dinallo, reducing the collateral requirement would increase insurance capacity in New York and result in decreased reinsurance and insurance rates. Even some of his supporters say this would be a tough argument to sell. But the insurance regulator plans to also make the case that the current collateral rule is unprincipled, an argument that Lloyd's has been making for years. The London market has long insisted that requiring foreign companies to post collateral in the United States is unfair, particularly when U.S. companies are not subjected to the same requirement overseas.   
  
Dinallo agrees that if he has his way he will impose principles-based regulation in New York to enhance -- not supplement -- technical rules currently on the books. On the issue of collateral, he says the only thing that should matter to a regulator is whether or not companies will be able to pay claims, and not whether they’re from Germany or Arkansas. This style of regulation requires more dialogue between regulator and the regulated, and a fundamental understanding of right versus wrong.   
  
The NAIC, which is currently working on several principles-based rules, has yet to comment. But some legal advocates are concerned. The law firm of Locke Lord Bissell & Liddell, in an article to clients, said while the regulatory flexibility of a principles-based approach is intriguing and offers some advantages over the current rules-based system, insurers should be concerned by how the New York regulator would interpret the principles, how the principles would interact with existing law, and potential litigation risk.   
  
For example, the New York insurance department currently regulates financial solvency of insurers based on a voluminous insurance code. Under the principles-based system, insurers simply will be required to “maintain adequate financial resources.” Does this mean, Locke Lord’s attorneys ask, if an insurance company meets all of the requirements in the insurance code, it could still be deemed by the New York insurance department to not have adequate financial resources?   
  
“To a certain extent, the detailed regulatory standards provide a licensee a safe harbor, which may be weakened by a principles-based approach,” the firm states.   
  
Also, the attorneys warn that in light of recent legal and regulatory actions brought against insurers and brokers by the New York attorney general, the industry should be concerned about the risk of future litigation against companies that might not follow state’s interpretation of the insurance principles.   
  
As with the collateral proposal, Dinallo can expect a vigorous challenge of his regulatory overhaul plan.