Two months into his new job as New York Insurance Superintendent, Eric Dinallo came to National Underwriter's office in Hoboken, N.J., to speak on a broad range of topics, but particularly to emphasize the need to update insurance regulation as part of a broader effort to keep the U.S. financial services markets globally competitive.
A joint report released on Jan. 22, 2007, by U.S. Senator Charles Schumer and New York City Mayor Michael Bloomberg warned that New York could lose its status as a premier global financial market without a major shift in public policy to address issues such as stringent regulation and high litigation costs. The report was backed by New York Governor Eliot Spitzer.
That warning was reinforced on June 12, 2007, in a report issued by MasterCard Worldwide, Purchase, N.Y., which listed London as the top city, surpassing New York, in a 50-city study on how cities affect the global economy.
In his conversation with NU, Dinallo left no doubt that change is needed to update financial services to reflect both domestic realities and global changes currently underway. His focus reflects the priority Spitzer places on the issue. Spitzer appointed Dinallo to a financial services commission charged with delivering a report by June 1, 2008.
The panel, the New York State Commission to Modernize the Regulation of Financial Services, is charged with reviewing all "current financial services statutes, regulations, rules and policies, and with proposing legislative and other necessary changes."
Dinallo says the commission will be issuing the product long before the June 1 deadline. "The governor will not be happy to let a year go by and just have a report plunked down in front of him." As part of the effort, the commission will take a "ground-up approach," he says.
When asked if modernization would include combining the New York insurance and banking departments, Dinallo said that was not the intent, but after a review of changes needed, it could be an outcome. The reason, he explained, is that the current system is one of silos, reflecting the Glass Steagall Act, which was replaced by the Graham Leach Bliley Act of 1999. The current system of silos is antiquated, Dinallo added.
Modernization would benefit life insurers because they are asset managers and many products now have components that reflect insurance and securities features, he explained.
Even though banks and securities are under federal oversight, Dinallo said there are areas such as state registration and licensing that can be "better synthesized."
With regard to the call of some in the industry to create an optional federal charter, Dinallo said he needs to give the issue further study, but he added, "I am not in favor of the optional part of optional federal charter."
The reason, he explained, is that it will create "regulatory arbitrage" where "you get into a situation where the regulated can play regulators off of each other, and that is not a good place to be."
There needs to be a serious examination of which is the right regulator, said Dinallo, who added that state regulators' handling of the World Trade Center and Katrina catastrophes demonstrate the capabilities of state regulation. He said consumers should be made aware of how state regulation has served them.
When asked about the NAIC's accreditation program, Dinallo said he thinks it is "appropriate" and can be a valuable tool for states.
"I have no problem with getting accredited," he said. "We are one statute away [property-casualty risk-based capital requirements.]"
But he also said he doesn't believe insurance departments, including New York's, should "make every decision based on whether it will get us accredited or unaccredited."
Regarding internal matters at the National Association of Insurance Commissioners, Dinallo said he believes that when legislative strategy is being discussed at NAIC meetings, it is appropriate for state legislators to be allowed to attend those sessions. Speaking about the last several closed regulator-only sessions, Dinallo said, "I can assure you, nuclear secrets are not being discussed."
However, he added, when investigations or other confidential issues are being discussed, "it is appropriate that some of the sessions are closed."
What will also be appropriate as regulatory oversight is modernized, said Dinallo, is the concept of principles-based reserving, which he favors. Some life insurance companies should be allowed "tailored treatment" because they better manage their risks. While PBR entails more monitoring, "the carrot" is that it could free up more capital for companies, he continued.
When asked about efforts to standardize international accounting standards, Dinallo said it is an effort in which U.S. insurance regulators should continue to participate.
Dinallo said New York is currently looking to streamline its own processes, initiating a project called 49-1, after a "snarky" phrase coined by insurers to describe the difference in regulatory requirements in New York state compared with other states.
The project is designed to "show all the ways by which we are unique, lousy or cutting edge." For instance, Regulation 60, which addresses replacement of life insurance and annuity contracts, might be the right way to proceed, Dinallo said, but it might also be better to simply have a suitability standard.
The New York department is in the midst of drafting legislation for life settlements, Dinallo said, and the draft will be "pretty advanced and pro-consumer." The draft needs to be ready soon so it can be advanced by the end of the legislative session in the next few weeks, he said.
New York abstained from voting on amendments to the Viatical Settlements model act, he said, not because it was a bad model, but rather because of specific provisions, such as a 5-year ban on settling contracts.
Dinallo said life insurers could do a better job of explaining the standards that they work under: insurable interest standards, a 2-year contestability provision, the tax benefits that life insurance products provide and anti-discrimination laws. For instance, he explained, if the same policy is sold to 2 people with similar risk profiles and one's health deteriorates but the other's doesn't, the 2 policies will now have different economic values. However, the insurer must offer each the same amount if they both surrender the policy. But life settlement companies, he continued, can "cherry pick" the policies that they purchase.
Life insurers' strongest argument for limiting life settlements is that life insurance is sold to benefit widows and orphans, he said. However, "that argument is somewhat undercut by the fact that the insurers themselves sell policies for other purposes, such as corporate-owned life insurance," according to Dinallo.
"Insurers could be one court decision away from facing very serious challenges," he warned. If a court found that an individual has a right to buy insurance even with the intent to sell the policy immediately, "there could be a rush to buy policies and sell them on the life settlement market that would bring a fundamental change in the life insurance market," he said.