NY Senate Budget Analysis of DFR

The NY Senate Republicans have released their analysis of Governor Cuomo’s budget, including the proposal to merge the Insurance Department, the Banking Department and portions of the Consumer Protection Board. In the document they conclude that there are no savings to be achieved and a cost of $6-$9 million primarily in consolidation expenses. The document doesn’t contain a narrative discussion of the merits of the proposal - it merely states the conclusions on costs.

NY's Proposed New Department of Financial Regulation

In the Executive Budget released today by Governor Cuomo, we get a look at the vision for the new Department of Financial Regulation. In the Agency Presentations release, (see pages 131-134) the mission of the new agency is described, in part, as follows: “The new Department of Financial Regulation (DFR) harnesses the regulatory powers and expertise of the Banking and Insurance Departments, as well as the Consumer Protection Board, to make the State’s oversight of financial services responsive to the 21st century needs of the industry and its consumers….Consolidation of these agencies and activities within a single agency platform will afford the State the ability to unify the State’s regulation of financial services and to more rapidly and adroitly respond to changing market practices and consumer preferences, thereby ensuring the industry’s continued integrity while shielding consumers from abuses.”

As I copied this passage from the budget book, I stumbled on the words “industry” and “industry’s” instead of “industries.” It appears that the regulatory consolidation is re-defining banking and insurance as a single industry.

After deciding to advocate consolidation of these two agencies, the governor could have taken the approach that while these industries are different and unique, there are enough similarities that regulatory economy can be achieved by combining agencies and personnel. But it seems he may be going much further.

At least in this preliminary view, it appears the regulatory framework being proposed in this budget is that there is a single industry; financial services. This document suggests that the governor views banking and insurance as more similar than different - they can not only be regulated by a single entity, they can be viewed as a single industry. If accurate, that is a huge shift in perspective and it could have very significant implications for how insurance is regulated in NY.

Another major initiative seems to be in the examinations the DFR will conduct. In the Program Highlights section of the discussion, under “Regulation” it states: “To ensure the safety and soundness of all regulated entities, the Department will monitor banks, insurance companies and other financial institutions to identify problems and will work with management to promptly solve them. The Department will carry out this responsibility through annual on-site examinations, regular review of institutional financial reports, and periodic site visits.”

Annual on-site examinations?

Under Budget Highlights, the document states that the proposed 1.1% increase in budget over the combined banking and insurance budgets in part “provides additional resources that will allow the Department to perform more on-site examinations of insurance companies. Increasing on-site examinations will result in savings to the insurance industry by reducing costly direct-pay examinations for which insurers contract with outside vendors to fulfill regulatory requirements.”

While there is no question that the third party vendors are expensive, it seems counter intuitive that doing more on-site examinations in this age of technology is more efficient and cost-effective. In addition, there are going to have to be very significant changes to the examination process if they are going to be annual. It could easily result in what are essentially perpetual examinations.

Finally, in the Consumer Protection section, there is another possible indication of changes to come. “The Department will strive for the fair treatment of insurance policyholders, claimants and the public through the regulation of company claim payments and sales practices, responses to consumer complaints, and the timely review of insurance company denials of coverage. The Department will promote high standards of industry conduct and competence through testing, oversight, and pre-licensing and enforcing educational standards of licensees.” No mention of approval of policy forms here. Instead, this states that “The Department will proactively educate consumers regarding unscrupulous financial industry practices and products and will advocate on behalf of consumers who have been defrauded or harmed by such abuses.”

Obviously much can, and probably will, change before the new agency gets finalized. And some of the proposals here would require other changes to law. However, one thing seems certain; there are many more changes coming to the regulation of insurance in NY than a change in the name of the executive agency.

NYSID Website Has New Page on Modernization Initiative

I have previously written about the Modernization Initiative. (See 12/3/2010 post.) Today the NYSID unveiled a new page on their newly designed website devoted to the Initiative. In addition to the final report of the committee looking at modernization, there is the previously announced first-ever webinar on doing “me too” property and casualty filings. Most interesting are the updates as of January 11, 2011 that are provided on that page. It is great to see some of the recommendations coming to life and being implemented. Given the concentration of my own work and my participation in the effort, it would be great to see some more updates dealing with the life side, but movement and progress is good!

It is also a good idea to have all the efforts pulled together in one place on the website so that those of us who are interested can find them easily and continue to follow the modernization progress. I am hopeful that the implementation will continue even though we are now looking at a future Insurance Department that may be combined with the Banking Department and the Consumer Protection Board.

"Insurance Compliance Insight" has Interesting Articles on Compliance Challenges for 2011

I find ProBusiness Publishing LLC, publication [Insurance Compliance Insight] (“ICI”) a great resource for information and I look forward to its weekly arrival in my inbox. Alan Prochoroff, Editor and Publisher, regularly discusses the issues that are most important to those of us who are engaged in insurance compliance. The January 10, 2011 edition of ICI has several articles that, taken together, point out some of the significant challenges facing the insurance industry from a compliance and regulatory perspective in 2011.

The lead story is about changes in commissioners around the country. All together, he identifies five new heads of Insurance Departments: in Minnesota (Michael Rothman), Ohio (New Commissioner is Unknown and Chief Policy Officer resigned one day after Mary Jo Hudson), Oklahoma (John Doak), Texas (Unknown) and Wisconsin (Ted Nickel). In the same article, he discusses our New York Governor’s proposal to combine Banking, Insurance and the Consumer Protection Board into a single regulator of financial services. Of course anytime there is a change of leadership in an insurance department there are changes to the regulatory climate in the state. Sometimes it is subtle and sometimes it is quite obvious, but there are always differences that need to be learned and understood.

Prochoroff’s article “CEFLI Opens for Business - Here’s What You Can Expect” offers some very interesting new insights into CEFLI. As many readers will know, IMSA dissolved late last year and became CEFLI. With the new website and public discussion of the new organization’s mission, the differences between the two organizations are becoming more clear. Also more clear is how CEFLI intends to position itself differently from AICP, LHCA and other compliance organizations: First CEFLI is focusing on Ethics as much as Compliance and the differentiation between the two. CEFLI is also looking to engage C-suite professionals rather than the more front-line compliance professionals who are the life-blood of both AICP and LHCA. CEFLI wants to engage with Chief Compliance Officers and Chief Ethics Officers. I agree that is a different focus than either AICP or LHCA has, but it is not as different from the ACLI’s Legal and Compliance Section and I would expect that group and CEFLI to work closely together. I am very interested to see how CEFLI evolves into its niche.

A later ICI article points to one of the challenges that CCOs and Chief Ethics Officers face. In “Best Practices Collide with Resources” a couple of Life insurance CCOs discuss with Prochoroff the challenges they face in this time of scarce resources but increasing compliance demands. The conclusion is exactly what CEFLI seems to want to address. When the number of rules governing insurance compliance is exploding, it becomes more and more difficult to maintain anything other than an exclusively rules-based system inside an insurer. If “ethics” goes beyond “mere compliance” to a higher, non-rules based system of and culture within a company, if all hands are on deck trying to comply with the multitude of new rules, there is little left over for more esoteric “ethics.” Not that anyone is saying ethics are not important, quite the contrary, just easily squeezed out in an effort to meet increasingly complex compliance demands. ICI discusses three specific examples of these increased demands in 2011: an annual doubling of data calls, the new annuity suitability regulation and Regulation 194 in NY, which mandates that producers disclose their compensation.

All this leads me to be very sure that there are enough issues related to ethics and compliance discussion and work to keep those of us who do it on a daily basis extremely busy.