Dinallo Strikes Again!

In his second bold regulatory proposal this month, New York Insurance Superintendent Eric Dinallo has again challenged the inertia paralyzing the nation's regulatory scene by pitching a plan to jettison the automatic 100 percent collateral requirement slapped on all foreign reinsurers. Instead, he is proposing a far less discriminatory plan based on a carrier's financial strength, as determined by at least two rating agencies. The knee-jerk reaction by some U.S. parties has been to blast the idea as “radical” and “potentially very risky,” but I think it's about time somebody acted to crack the ice and speed up the glacial pace on long overdue reform of this archaic restriction set by regulators nationwide.

To read more details about Mr. Dinallo's plan, click here and here.

The controversial suggestion comes as the National Association of Insurance Commissioners continues its seemingly endless, excruciating debate about whether to change its own model law, which for ages now has arbitrarily imposed massive collateral requirements on all foreign reinsurers, whether they are Lloyd's of London or some other well-respected market. (To get up to speed on the latest NAIC action on this issue, click here.)

There certainly hasn't been a dull moment in New York lately, what with Mr. Dinallo earlier this month proposing a plan to require property insurers to set up catastrophe reserves to try to even out the boom-and-bust cycle rattling the Empire State's hurricane-prone stretches–regardless of the short-term federal income tax implications for carriers. (To read more about that plan, click here, and check out my blog entry on Oct. 10.)

The fact that my blog entry prompted only two published responses–one from a consumer advocate–shows that no one in the industry is ready to rise to the challenge I raised: That if they didn't like Mr. Dinallo's plan (which many insurers are grumbling about), they need to come up with a viable alternative that doesn't involve massive price hikes or market withdrawals.

Will insurers again lay low after tossing a few choice words of criticism Mr. Dinallo's way? The responses to this blog (or lack thereof), read by some 9,000 people in the industry, will provide a good barometer. But expect Mr. Dinallo to keep pressing the peddle to change this cockamamie system one way or the other.

What does the dithering NAIC make of all this uprising in its ranks? For now, the regulator association is reacting most graciously to Mr. Dinallo's threat of unilateral action, which he hopes will invite additional foreign capital, boost capacity and lower rates for his state's risks. NAIC President Walter Bell, Alabamas insurance commissioner–who received a head's up from Mr. Dinallo prior to the New Yorker throwing down the gauntlet–simply released a statement saying his group recognized that New York operates as a sovereign regulatory authority.

We applaud the New York Department for its leadership and innovation in this first initiative of reinsurance modernization, he added. We look forward to working with them in the ongoing national dialogue to modernize U.S reinsurance regulation.

What I hope is that if Mr. Dinallo's move accomplishes nothing else, it finally forces the NAIC to finally get off the pot and pass a new model law that deals more realistically and reasonably with those from outside the U.S. seeking to write reinsurance here. Certainly, it makes no sense to impose such harsh burdens on a foreign market as critical as Lloyd's, for example.

Mr. Dinallo's style reflects that of his boss, Gov. Eliot Spitzer, who tends to act first on what is considered best for the state, and ask questions later. It's a jarring change from the business as usual, show me where you want me to go and I'll lead you there approach practiced by far too many political weaklings on the state and national level.

Are Mr. Dinallo's proposals on cat reserves or reinsurance collateral perfect? What plan is? But at least the New York superintendent is moving the conversation forward in a hurry, and insurers are free to make their case during the comment period.

However, long term, this again shows how difficult it is for the insurance industry to function under a regulatory system with each sovereign state free to go its own way. While I personally would prefer to see regulation exercised at the state level, with some substantial leeway given to account for local needs, proposals to establish federal benchmarks for states to follow is increasingly appealing, especially in areas like foreign reinsurance, surplus lines and catastrophe reserving.

But until that time comes–if ever–kudos to Mr. Dinallo for once again forcing the issue. The ball is in your court, NAIC and U.S. insurers!

What do you folks make of his latest proposal?