A New York State of Mind

Superintendent Eric Dinallo Redefines the Role of Regulator in the Insurance Industry

New York Insurance Superintendent Eric Dinallo was thrust into the national spotlight last year as the insurance industry’s then-largest company, American International Group, began its precipitous collapse. It was just one of the myriad, complicated issues that Dinallo — arguably the highest-profile commissioner in the country — has waded into since assuming office in 2007. In this exclusive interview with Insurance Journal’s Ken St. Onge, Dinallo gives an inside view of his approach to regulation and what he sees as the problems and solutions that the insurance industry needs.

Insurance Journal: You’ve proposed reviving the New York Insurance Exchange. Why?
Eric Dinallo: We have no mechanism for an American-based marketplace. We don’t really have a Lloyd’s at all in the United States. And the reason that I think that’s a great opportunity is there’s tons of capital that otherwise does not come into insurance that, for large property or reinsurance transactions, would be appropriate. So, you have, historically, hedge funds, private equity, investment banks that have had to go through pretty tortured mechanisms of getting exposed to insurance risk. The great thing about property and large reinsurance risk is that it’s uncorrelated to the market. So, my belief is that there’s going to be a pretty big demand for this once the markets recover, and as reinsurance hardens, there’s this opportunity.

IJ: How will this insurance exchange be different than the previous incarnation?
ED: I think there’s the possibility for a lot of capital sources other than just simply property-and-casualty companies coming into the exchange. I also think that improvements in technology will give us a very big advantage that we didn’t have in the ’80s.

IJ: What does the time line look like for a New York Insurance Exchange?
ED: Well, I’d like to try to get the bones and the proposals and everything you would need to get together before the bell was rung, so to speak, in ’09. I mean, there’s a lot of work. You need to get the regulations back in place. You need to get infrastructure. You need to find a physical location. Just starting to identify these, you’d need to get committed capital. If we can get that much done in ’09 … that would be a pretty good achievement.

IJ: New York’s workers’ comp system was overhauled in 2007. How has it changed, and do you think it’s working well?
ED: Well, I think the overhaul’s been fantastic. We have a much more free market than we had before. I think that the ways that we’re pricing are just much more accurate, and that people feel that they’re being more fairly treated in the sense of the pricing accuracy for it. The roll-up of the data is much better than it was before. And I think that the deal that was finally struck, from a legislative point of view, was socially correct. So, the most extremely injured people got taken care of, and maybe even got an improved situation, and others, who of course did deserve compensation, were able to get something that was more able to give a greater social good. And so I think we ended up in a much better place.

We still have work to do. We still have to get more. And we have a working group that’s dedicated to this … (T)he ways in which you would judge someone’s injury has to get developed, and there’s going to be some versions of that that are going to be debated about.

Bringing it into the 21st century, in a data-driven way, is, I think, the general success. But, of course, the deal you’re alluding to was struck almost two years ago, and we still see that, although that was very successful — I think it’s been almost universally well-received — there’s still more work to be done.

IJ: How do you feel anti-fraud efforts are working in New York, and would you like to see more of them?
ED: The numbers (show) that anti-fraud measurements really help. They drive down the costs in the insurance system. There’s a tremendous amount of essentially stolen money coming out of the insurance system. We work closely with the (investigators) of various companies. We have a pretty robust police force, essentially. Although they’re not necessarily police; they’re peace officers.

I’m a big proponent of it, especially having been at the DA’s office myself and the AG’s office. Steve Knockman, who essentially headed one of the major anti-fraud units at the attorney general’s office, has come over to work on this. I’m very proud of our progress. More can be done. It’s essential. I think it makes a difference in pricing, and it’s the right thing to do.

But, if you don’t enforce — it’s one of those kinds of crimes that without severe enforcement episodes, people kind of drift into it, frankly.

IJ: Agents have been highly critical of the New York State Insurance Fund. They feel that they can’t compete against it adequately. Do you think that’s true? Would you like to see any changes made?
ED: Well, I think this is a fair question … To the extent that the agencies have a complaint, it was supposed to be kind of the residual market, sort of like assigned risk in the auto situation, and now it’s grown to be the dominant player in workers’ comp. That’s a fair question to ask. They have tremendous state resources, so their ability to price aggressively comes from the fact they’re a socialized entity.

Obviously, people are going to look at it … but I don’t know what the right future is … It’s something that I think needs to be addressed, because I don’t think we’ve really reviewed it in a long time.

IJ: How would you characterize your relationship with agents in New York State?
ED: Well, I’d like to think it’s positive, of course. [laughs] I do think it’s positive. I think that the insurance agents are very … What’s the word I’m looking for? They are very aware, involved, appreciative of local and state politics and of the state regulatory system. So, they’re usually big fans of state regulation of insurance and one of the enemies, so to speak, of federal charters, an optional federal charter. And obviously, I acknowledge that, and we work well together. … I like my relationship with them … (and) I like to meet with them. They’ve come to the office a lot, [laughs] because they’re very active. And that’s good.

IJ: Between the various issues that the department’s faced over the last couple of months, such as AIG, default swaps and the bond market, how has that affected the agency’s ability to respond to everything?
ED: That’s a really good question. The reason that we’ve been able to address some of these global issues, and why I’ve felt comfortable having us out there working on them, is because the agency is really so excellent, frankly … one of the jewels of state government … (W)e can operate from a completely secure, excellent base, and do things like credit defaults swaps, the bond insurers and AIG, (without) sacrificing the core of our mandate, which is the regulation of the markets, insurance companies, and consumer protection.

But, I’ll say that I sometimes feel guilty, because there have been moments when I wanted to delve more into, say, health insurance, or some of the personal lines of property insurance, as opposed to some of the major property-insurance issues that we’ve dealt with, like the settlement of the World Trade Center case, and life insurance…. But, I do think it has not really been a lost year for that, because even the big issues are really just macrocosms of the smaller or more local issues.

IJ: You’re a self-described agnostic when it comes to federal regulation. What do you see happening in terms of federal regulation of insurance?
ED: There are areas where you could have reasonable federal regulation, or at least it should be discussed. Reinsurance would be an area where it’s hard to make the “we’re protecting the consumer” argument. It’s a totally fungible, capital-markets undertaking. Some argue about life insurance, because it’s a transportable policy as opposed to the local kind of property issues. The bond insurers, the monolines, are an issue which I think we navigated extremely well. But, if one said this is really a capital-markets issue, and the federal government wants to be sure that it’s done a different way, I don’t think we should really argue about that as much as we should be arguing about what’s the motivation. If people are using arguments like AIG — which, to me, is quintessentially an example of good state regulation, because the solvency of the operating companies exists because of the state regulatory system — then that’s what kind of irks me.

I still see no world view where the federal regulatory authorities are ready to deal with the 70,000 complaints we receive every year, the auto rates, the medical malpractice, and the homeowner’s insurance. This is inconceivable to me. There are 15,000 state regulators, essentially, when you roll them all up, from Alaska to Puerto Rico. Are we going to have a second, sort of a shadow group of the same magnitude? I don’t think that’s really a business plan.

IJ: You’ve talked a lot about contract certainty, particularly as it comes out of the World Trade Center attacks. What does that mean to the insurance market, particularly for property/casualty brokers?
ED: Well, for PC brokers, where it’s really an issue, it means that essentially 90 percent of their slips — their binders — will be in a firm policy within 30 days. It’s a reasonable time period. This is important because the concept that we let our financial-services industry and insurance engage in these very complicated policies with absolutely no policy in place is just crazy. We’re doing sophisticated risk placement, but there’s no definitive contract as to who bears the risk in certain scenarios.

And that’s what happened with the World Trade Center. The attacks occurred. There were no policies. The lack of policies resulted in six years of the most robust litigation you can imagine. I think the estimates were literally $100,000 a day for lawyers’ fees on that litigation. And it only favors the litigators. And I don’t think it favors the underwriters, it doesn’t favor the brokers, and it certainly doesn’t favor the customer.

So, my view is, if London can do it, New York can do it. It’s probably not as big of an issue for personal lines. I think those placements are usually done. But, in any of the complex, sort of multi-geographic or large property placements, like the World Trade Center, I think it’s the only path.

Topics New York Agencies Legislation Reinsurance Property Market AIG