N.Y. Proposes Principles-Based Regulation

New York Superintendent Eric Dinallo is making good on a promise to break down the traditional approach to insurance oversight with a draft proposal to establish principles-based regulation. The question now is how the industry will react.

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

The principles-based regulations are designed to update and eliminate regulations that have become "Byzantine" in a modern financial world, he said.

"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 June 18, page 12), as well as a "Final Say" in the Nov. 12 edition of NU ("Principles-Based Regulation Needs Robust RM Structure").

"If you say stuff and don't follow through, that is the worst of all worlds because people don't take you seriously," he said. "If you actually put [these ideas] into place, the industry will see we are willing to work with them and move the agenda forward."

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 issued with the proposals.

A department official said principles-based rules can be used in a wide range of areas, including:

o Establishment of reserves on a nonformulaic basis.

o Claims-handling by insurers.

o Capital requirements based on internal models instead of the department's risk-based capital formulas.

The principles will be distributed for discussion by the industry and consumers and will be on the agenda of the New York State Commission to Modernize the Regulation of Financial Services, which Mr. Dinallo chairs.

"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."

The full text of the principles is available at the department's Web site at www.ins.state.ny.us.

For the industry, among some of the 10 principles, 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 their conduct with clients. They maintain that the licensee will be open and cooperative with the superintendent's "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, the principles continue, "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" while respecting "a firm's senior management for its activities" and holding management "responsible for risk management and controls."