Principles Based Insurance Regulation

[llcooljabe]

On the surface this sounds like a positive move, I haven't heard of this before this article. Any comments?

New York Insurance Commissioner Wants Principles-Based Regulation in State

NEW YORK November 06 (BestWire) — New York’s insurance superintendent Eric Dinallo is moving the department toward principles-based regulation in a bid to make the financial services capital more insurer-friendly.

If implemented, New York will be the first state to regulate insurance in this manner. The United Kingdom's Financial Services Authority and other European regulators have long been champions of this approach.

Dinallo told BestWire he plans to forge ahead with this proposal, and isn't waiting for guidance from the National Association of Insurance Commissioners, which sets many of the rules state insurance regulators follow. In fact, the insurance regulator expects for varying reasons some at the NAIC to balk at the idea.

But left to him, Dinallo says the principle-based approach is the most effective form of regulation when it is accompanied by "rational underlying rules and regulations that are not overly burdensome and too technical as to be impossible to conduct business with." The principles ask companies to be ethical to their core, rather than focusing on technical rules.

Just months ago, when two carriers supposedly refused to renew certain homeowners coverage in New York on the grounds that those homeowners did not have other business, such as life and auto insurance, with them, Dinallo forced the companies to stop that practice, warning that it constituted unlawful inducement and violated insurance law.

Under the principles-based system proposed by the superintendent, that practice would have also violated insurance principle No. 4, which requires companies to observe proper standards of market conduct.

"The principle there is that these guys go out and say publicly that 'the reason we're not renewing is because we want to reduce our risk exposure on the coast. But if you have auto and life insurance with us then we're more likely to keep you.' That's inconsistent, and it's unprincipled," Dinallo said.

Unprincipled is also the insurance regulator's view of current collateral requirements for foreign reinsurers — a regulation that he's now trying to change.

"The principle is are you solvent and are you going to pay your claims? Not whether you're German or from Arkansas. We were requiring a 100% from overseas reinsurers and nothing from domestics even if the domestic's solvency rating is [low].That's completely unprincipled."

Last month, Dinallo proposed a new measure that would eliminate or reduce the reinsurance collateral requirement for well-capitalized reinsurance companies with the highest credit rating that are not authorized or accredited to do business in New York. Companies that are not as strong will have to post collateral on a sliding scale from 10% to 100% (BestWire, Oct. 24, 2007).

As someone who worked with Eliot Spitzer at the New York attorney general's office and led investigations into conflict-of-interest dealings on Wall Street, Dinallo says principles would have been enormously helpful to the probes.

"Having been on the other side, having done compliance, you do often wish that when there's a gray area in the rules, which there will always be, you can refer to something," he said. "The rule can only go so far, but when you have a principle that says you can't really do this because there's not full disclosure or conflict is not completely vetted, it will help people make decisions in some of the gray areas."

Companies take compliance more seriously when there are principles to abide by, he adds. "It brings compliance up to a higher order of consideration by the companies. It tends to elevate it to a board or management company level because people begin to ask about the business model and whether or not it's in conformity with the principles."

Under the principles-based approach, the New York insurance department staff’s new role in assessing adherence to outcomes and recognizing prospective risk in insurance companies will require robust professional judgment, reinforcement from management and continual training, the superintendent's office said in a statement.

Dinallo has also created a list of principles for regulators, which he says will assist the office in this migration as it provides the foundation for the professional judgment exercised by staff.

The NAIC wasn’t immediately available for comment.
(By David Dankwa, senior associate editor, BestWeek: David.Dankwa@ambest.com) BN-NJ-11-06-2007 1702 ET #

[JMO]

Sounds like a winner to me. In buzz-word Bingo. Just sayin'

[Westley]

Positive in theory. In practice, just another way for regulators to make the market do things that help them stay in power. "It's against actuarial principles to charge those people on South beach more than their historical experience says; a hurricane has never hit there, you shouldn't be charging for hurricanes."

[Morrison]

Under Principals based regulation, who is actually enforcing the rules matters a lot more than our current system where rules and multitudes of regulations rule supreme. If we have appointed, skilled, and professional regulators enforcing the principals (as in most of Europe), I am all for it. If we have the incompetent, politically oriented, ignorants in charge that too many states have today, I am against it.

This type of principal based regulation does appear to pave the way for the de-regulation of rates in markets that are competitive.

I will say, Dinallo seems like a pretty forward thinking guy. If there were more regulators who had his mindset (improve the insurance market) vs. that so many other regulators show (increase my power), this industry would be in a much better place.

[Floridiot]

I wonder if cat modeling will be in compliance with their principles.