New York State Insurance Superintendent Eric Dinallo put forwarda draft proposal today to establish principles-basedregulation.

The superintendent issued 10 principles for insurers and 10 forregulators. Mr. Dinallo contends it will help create a more nimbleinsurance industry that will be more competitive on the world stagein the face of increased competition.

The principle based regulations are designed to update andeliminate regulations that have become “Byzantine” in a modernfinancial world, he said.

For the industry, among some of the 10 principals, a licenseewill conduct business lawfully “with integrity, due skill, anddiligence.” They will take care to “organize and control theiraffairs responsibly and effectively, with adequate risk managementsystems.” It will also be their responsibility to maintain adequateresources, observe proper standards of market conduct, treatclients fairly and “pay due regard to their best interests.”

The principles also put the responsibility on the licensee to befair and reasonable in care and decisions in their conduct withclients. It also maintains that the licensee will be open andcooperative with the superintendents “reasonable requests” forinformation.

For the regulator, the principles call for “independent andobjective” decision making, and the concentration of resources onimportant areas while assessing “risk comprehensively.”

The regulator must also consult with interested parties and giveguidance that is “readily available and easily understood.”Implementation of new regulations should “minimize theadministrative burden on regulated entities.”

Investigations and inquiries should not take place, itcontinues, “without an appropriate basis” and the regulator shouldnot request “unnecessary or needlessly duplicativeinformation.”

It should be the job of the regulator to “allow and encouragecompetition and innovation” and respect “a firm's senior managementfor its activities” and complying “with requirements” and holdingthat management “responsible for risk management and controls.”

“What we are doing is executing on what we have told people weare going to do,” said Mr. Dinallo, noting that his ideas forchange were outlined in a National Underwriter interview (see NU,June 18, page 12).

“If you say stuff and don't follow through, that is the worst ofall worlds because people don't take you seriously. If you actuallyput [these ideas] into place the industry will see we are willingto work with them and move the agenda forward,” he commented.

The principles are intended to “reduce unnecessary regulatoryand administrative burdens, ensure that regulation and itsenforcement are proportionate, accountable, consistent, transparentand targeted, and provide benefits for consumers from moreefficient markets, more effective protection, and betterresponsiveness to consumer's needs,” according to a statement withthe proposals.

The principles will be distributed for discussion by theindustry and consumers and be on the agenda of the New York StateCommission to Modernize the Regulation of Financial Services. Mr.Dinallo is chairman of the commission.

“I think this is an exciting time for the industry and ouragency,” said Mr. Dinallo. “I think there are a lot of positive andpotentially memorable things we can do and this is another example.It's important to get this out there and see what peoplethink.”

As for the principles themselves being proposed:

o 10 Principles for the Insurance Industry:

(1) A licensee shall lawfully conduct its business withintegrity, due skill, and diligence.

(2) A licensee shall take reasonable care to organize andcontrol its affairs responsibly and effectively, with adequate riskmanagement systems.

(3) A licensee shall maintain adequate financial resources.

(4) A licensee shall observe proper standards of marketconduct.

(5) A licensee shall pay due regard to the interests of itsclients and treat them fairly.

(6) A licensee shall pay due regard to the information needs ofits clients, and communicate information to them in a way that isclear, fair and not misleading.

(7) A licensee shall manage conflicts of interest fairly, bothbetween the licensee and its clients and between clients.

(8) A licensee shall take reasonable care to ensure theappropriateness or suitability of its advice and discretionarydecisions for any person or other entity that is entitled to relyupon such.

(9) A licensee shall ensure that the assets of any client forwhich the licensee is responsible are adequately protected.

(10) A licensee shall interact with the superintendent and otherregulators in an open and cooperative way, and shall disclose tothe superintendent any information relating to the licensee ofwhich the superintendent would reasonably expect notice.

o 10 Principles for Regulators:

(1) Regulators, and the regulatory system as a whole, shouldassess risk comprehensively and concentrate resources on the mostimportant areas.

(2) Regulators should be accountable for the efficiency andeffectiveness of their activities, while remaining independent andobjective in the decisions they make.

(3) Guidance from the regulator should be readily available andeasily understood.

(4) Interested parties should be consulted as appropriate priorto issuance of written guidance by the regulator.

(5) When developing new regulations, the regulator shouldconsider how they can be implemented and enforced using existingsystems and data to minimize the administrative burden on regulatedentities.

(6) No investigation or inquiry should take place without anappropriate basis.

(7) The regulator should not require a regulated entity toprovide unnecessary or needlessly duplicative information.

(8) All regulatory action should be proportionate to the issuebeing addressed.

(9) Regulators should allow and encourage competition andinnovation, while ensuring against insolvency and protectingconsumers and markets, and only intervene as necessary to protectconsumers and markets.

(10) Regulators should respect the responsibility of a firm'ssenior management for its activities and for ensuring that itsbusiness complies with requirements and hold senior managementresponsible for risk management and controls.