Dinallo Proposes Insurance Regulation Principles

New York State Insurance Superintendent Eric Dinallo put forward a draft proposal today to establish principles-based regulation.

The superintendent issued 10 principles for insurers and 10 for regulators. Mr. Dinallo contends it will help create a more nimble insurance industry that will be more competitive on the world stage in the face of increased competition.

The principle based regulations are designed to update and eliminate regulations that have become “Byzantine” in a modern financial world, he said.

For the industry, among some of the 10 principals, a licensee will conduct business lawfully “with integrity, due skill, and diligence.” They will take care to “organize and control their affairs responsibly and effectively, with adequate risk management systems.” It will also be their responsibility to maintain adequate resources, observe proper standards of market conduct, treat clients fairly and “pay due regard to their best interests.”

The principles also put the responsibility on the licensee to be fair and reasonable in care and decisions in their conduct with clients. It also maintains that the licensee will be open and cooperative with the superintendents “reasonable requests” for information.

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

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

Investigations and inquiries should not take place, it continues, “without an appropriate basis” and the regulator should not request “unnecessary or needlessly duplicative information.”

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

“What we are doing is executing on what we have told people we are going to do,” said Mr. Dinallo, noting that his ideas for change 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 of all worlds because people don't take you seriously. If you actually put [these ideas] into place the industry will see we are willing to work with them and move the agenda forward,” he commented.

The principles are intended to “reduce unnecessary regulatory and administrative burdens, ensure that regulation and its enforcement are proportionate, accountable, consistent, transparent and targeted, and provide benefits for consumers from more efficient markets, more effective protection, and better responsiveness to consumer's needs,” according to a statement with the proposals.

The principles will be distributed for discussion by the industry and consumers and be on the agenda of the New York State Commission 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 our agency,” said Mr. Dinallo. “I think there are a lot of positive and potentially memorable things we can do and this is another example. It's important to get this out there and see what people think.”

As for the principles themselves being proposed:

o 10 Principles for the Insurance Industry:

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

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

(3) A licensee shall maintain adequate financial resources.

(4) A licensee shall observe proper standards of market conduct.

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

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

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

(8) A licensee shall take reasonable care to ensure the appropriateness or suitability of its advice and discretionary decisions for any person or other entity that is entitled to rely upon such.

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

(10) A licensee shall interact with the superintendent and other regulators in an open and cooperative way, and shall disclose to the superintendent any information relating to the licensee of which the superintendent would reasonably expect notice.

o 10 Principles for Regulators:

(1) Regulators, and the regulatory system as a whole, should assess risk comprehensively and concentrate resources on the most important areas.

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

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

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

(5) When developing new regulations, the regulator should consider how they can be implemented and enforced using existing systems and data to minimize the administrative burden on regulated entities.

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

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

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

(9) Regulators should allow and encourage competition and innovation, while ensuring against insolvency and protecting consumers and markets, and only intervene as necessary to protect consumers and markets.

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