New York Insurance Superintendent Eric Dinallo, in a wide-ranging interview with National Underwriter staff today, said he can support a move for a national Office of Insurance Information, but if federal regulation is ever approved, it should be mandatory because an optional federal charter would result in "regulatory arbitrage."
Responding to questions from editors during a 90-minute interview at NU's editorial headquarters in Hoboken, N.J., Mr. Dinallo also said:
o He is optimistic that New York will finally secure accreditation this year from the National Association of Insurance Commissioners.
o He is receiving positive industry feedback to his attempt to resurrect the New York Insurance Exchange, and would like to see the facility be competitive with Bermuda when it comes to taxation.
o An insurance department policy of shielding the names of felons who work for insurers, when their employer requests it, will be reexamined.
o He said he could support some limited form of federal bond insurance, but warned there could be problems, and wondered whether Washington understands the scope of the market exposures it proposes to tackle.
Mr. Dinallo said he could support legislation for a U.S. Office of Insurance Information that is backed by Rep. Paul Kanjorski, D-Pa., who chairs the Capital Markets Subcommittee of the House Financial Services Committee.
The regulator said he was "pretty supportive" of the OII concept because he believed it would serve as a touch point to provide Congress with needed industry knowledge when it deals with legislation such as the Terrorism Risk Insurance Act.
He added that he does not believe creating an OII would serve as a precursor to the federal government taking insurance regulation away from the states–the proverbial "camel's nose in the tent."
However, Mr. Dinallo opposes the idea of an optional federal charter, because he said he believes it would lead to companies shifting back and forth from federal to state oversight, seeking the most lenient regulator. He noted a recent press report on the experience of state- and federally chartered banks, which he said had noted 200 cases of such jurisdictional shifts, driven by a desire to be supervised by the most lenient regulator.
An optional federal charter is "preordained with bad outcomes," he warned.
Mr. Dinallo said a key reason why New York, unlike most states, has not been accredited by the NAIC is because until last year it lacked a statute regulating risk-based capital. Now that such a law has been passed, New York will get accreditation done in 2009, "assuming the NAIC finds us adequate," he predicted.
NAIC accreditation of a state means it meets the organization's standards for setting insurer solvency rules, along with a variety of other requirements. The accreditation program is an attempt by the NAIC to establish national uniformity in insurance oversight, and New York's lack of accreditation has long been seen as undermining that goal, at least in terms of perception.
Concerning the effort to bring the New York Insurance Exchange back to life, Mr. Dinallo said he has found unidentified "major top-end brokers who are very interested" in doing business with such a facility if it can bring new capacity to capital-starved markets. He said he is investigating whether at this point there is enough economic demand to resurrect the exchange, which opened and closed in the 1980s, although the authorizing statutes are still on the books.
He noted that the technology available to run a syndicated exchange today is far superior to when the market crashed and burned in the 1980s, offering the potential for far greater transparency and insight into where counterparty risk would be placed.
Reinsurance, he noted, would likely be the top line that would be traded on the exchange, followed by property-catastrophe risks, including terrorism. The exchange might even provide a transparent, regulated platform to deal in credit default swaps, he suggested.
Mr. Dinallo said he envisioned exploring the possibility of providing tax breaks for exchange business, to at least make its operations "tax neutral" in comparison with doing business in Bermuda, which would be a chief competitor.
With the current focus in Washington on financial services regulatory reform, Mr. Dinallo said for the moment the state's New York Commission to Modernize the Regulation of Financial Services may limit itself to a more regional "spot modernization" type of activity.
At the local insurance level, Mr. Dinallo said he would examine his department's decision in 1998 to grant an insurance company's request to withhold the name of a convicted felon who was given a required waiver to work in the insurance industry.
Concerning statements by Rep. Barney Frank, D-Mass., chair of the House Financial Services Committee, that he would seek to develop an FDIC-type insurance system to insure general obligation municipal bonds backed by the full faith and credit of the states, Mr. Dinallo said he could support such a concept–depending on how deep into the market it went.
He said he does not believe the government could support all the revenue bonds issued by various municipal authorities, hospitals and museums.
There is a danger of creating a "moral hazard" that government entities would "float any old bond," he said. But he hailed Rep. Frank for moving to stop "the charade" that the federal government is unwilling to bail out state and local entities that run into financial difficulties.
The New York superintendent, who has been active in working to prop up municipal bond insurers since they ran into financial difficulties last year, said his department has gone to the U.S. Treasury to help restore bond insurer "Triple-A" ratings.
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