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Insurance commissioners are traditionally defined by two categories—either pro-business or pro-consumer, with the former most often identified as Republicans, and the latter usually being Democrats. However, New York’s new insurance superintendent—placed in charge of a commission evaluating all financial services regulation in the Empire State—appears determined to steer a third course emphasizing pragmatism, effectiveness and efficiency.
Last week, Eric Dinallo, 43, sat down for an interview with editors from National Underwriter to discuss his regulatory philosophy as well as his broader charge in spearheading modernization of financial services oversight.
He also provided a peek into his role and that of his boss, Gov. Eliot Spitzer, in the behind-the-scenes negotiations that led to the settlement between seven insurers and Silverstein Properties of over $2 billion in lingering World Trade Center claims (see NU, May 28, as well as the accompanying story on page 14), while also addressing ongoing debates over federal versus state regulation and producer compensation.
Mr. Dinallo—named to his post in January, and confirmed by the legislature in mid-April—is best known for his work probing the financial services industry as financial crimes prosecutor under Gov. Spitzer, a Democrat, when his boss was New York’s attorney general.
Those probes into the mutual fund industry and investment banking were followed by investigations exposing the contingency fee scandal that rocked the insurance industry with charges of bid-rigging and account steering. The result was major brokerages paying billions in settlements and radically reforming their standard operating procedures.
Since 2003, Mr. Dinallo has worked on the other side of the fence, most recently joining the insurance brokerage firm Willis Group Holdings in 2006 as general counsel, where he served until his nomination earlier this year as superintendent. Before taking his Willis post, he left the AG’s office after four years as chief financial crimes prosecutor to become managing director and global head of regulatory affairs for Morgan Stanley.
In his June 11 interview at NU’s Hoboken, N.J., headquarters, Mr. Dinallo made it clear Gov. Spitzer did not have to twist his arm to convince him to take another government position.
“I love public service,” he said when asked why he left Willis. “It is often the most satisfying work I have ever done.” He added that “when the governor calls and asks you to join, it’s a huge incentive. It is hard to say no to someone you respect so much.”
While in past years some might have viewed the job of insurance superintendent as a backwater appointment, the position today has a high-profile status not only because of Gov. Spitzer’s history with the industry but due to his call for broader financial services regulatory reform.
Gov. Spitzer signaled his confidence in Mr. Dinallo by signing an executive order late last month naming the superintendent to chair the newly created New York State Commission to Modernize the Regulation of Financial Services.
That’s not to say that his day job as insurance superintendent doesn’t carry sufficient challenges. “I think this position should be a major appointment because New York is the insurance capital of the world,” according to Mr. Dinallo.
The New York Insurance Department—despite its lack of accreditation by the National Association of Insurance Commissioners—is among the country’s preeminent insurance regulators, he added, with its importance magnified by the fact there is no federal equivalent backing up state insurance regulators.
Mr. Dinallo does not shrink from the role or the responsibility, arguing that one prime reason for keeping state oversight authority intact is because states can serve as a great “laboratory” for coming up with the kinds of regulations that will help the financial services industry grow and prosper.
“Insurance has the most open field to run on from a new approach point of view,” Mr. Dinallo said. “What is funny is that this is not all just pro-consumer, because the industry itself, more than anyone else, is asking for new regulations [and] the kind of advancement and changes we have not seen in 100 years. It is really a great opportunity to get a lot done.”
However, he said the antiquated silo approach to regulating the broader financial services industry may have outlived its usefulness, as entities outside of the traditional insurance sector develop products similar to what insurers offer, and vice versa. Given this blurring of industry boundaries, he added, the current regulatory system may no longer be up to the task of handling the emerging market.
With the confirmation process and arduous World Trade Center claim negotiations behind him, he said the next phase will include staffing the regulatory reform commission, which will be comprised of representatives from various segments of the financial services industry, including insurance.
“It is okay to stop and listen to the industry and the press and say, ‘Yes, we need major updating if we are to remain on the cutting edge,’” he noted, adding that ultimately the results could be a national model for reforming the overall financial services industry—even on the federal level.
While the panel’s study is not due until next June, Mr. Dinallo emphasized that Gov. Spitzer is not the type of leader who is going to just wait around for a thick document that “gets plunked on the table.” Instead, he said he expects to be recommending changes as the study proceeds.
“What we do very well on the insurance side is protect consumers. We have robust exams and enforcement,” he said. “But I don’t think we have been great on bringing product to market, policy rate and review. We could synthesize that and streamline it a lot to help the industry move faster.”
He spoke approvingly of principal-based regulation—an approach adopted by European regulators and the United Kingdom’s Financial Services Authority, that gives insurers a regulatory goal but allows them to decide the best course of action to achieve it, rather than prescribing what they must do in advance.
In reviewing regulations and compliance while contemplating modernization, he explained that his philosophy comes down to a simple query: “What was the wrong or evil that this rule was intended to prevent? That is a core question." If particular rules, procedures or regulations turn out to be antiquated or simply ineffective, they need to be changed or abolished in pursuit of modernization, he added.
He said he is a big proponent of regulation over legislation because regulations are not permanent and are easier to change as the market dictates.
“There is a ton of positive movement—pro-consumer, pro-industry and pro-common sense—that could be done and should be done through regulation,” he said.
When it comes to calls for Washington to create an optional federal charter, he made it clear he opposes the “optional” part of the equation, arguing such a voluntary system would lead to “regulatory arbitrage,” in which insurers could play state and federal regulators against one another.
On the other hand, there are some situations where federal oversight of certain markets—such as global reinsurance, commodity-driven life insurance, or large commercial risks—would be beneficial, he conceded.
However, on local matters, he said he doubted the federal government would be effective. “States do an extraordinary job locally,” he said. “The World Trade Center [settlement] is a prime case. I don’t think you would see the federal government come in and settle that.”
When asked about New York being the only domicile outside of the U.S. protectorates that has not received NAIC accreditation, he repeated a request he made at a recent NAIC meeting: “Please, help me get accredited.” Though he said this in jest on both occasions, he noted that the state is one piece of legislation away from becoming accredited.
However, reliance on legislation for accreditation can be a burden on the path toward modernization, according to Mr. Dinallo. In a project dubbed “49-1,” underscoring New York’s uniqueness, he said the department is reviewing where it is meeting legislative goals established by the NAIC, but might be accomplishing those goals through regulation instead.
Mr. Dinallo stressed the need for regulators to become more imaginative in developing rules to modernize the industry.
One idea to help the NAIC and legislators in their quest for uniformity is to enter into interstate compacts, similar to what is already done with environmental agreements.
“This is an opportunity which I don’t think the NAIC has taken to push back [at criticism from the National Conference of Insurance Legislators] and say this is acknowledged in the Constitution. It is something that needs to be discussed and a way to argue back,” Mr. Dinallo said. “It is not an antitrust undertaking but instead a recognized way that states can get together and create uniformity and best practices.”
In response to a question about the NAIC itself, which has been roundly criticized for its glacial pace, Mr. Dinallo said the association needs to highlight its accomplishments and those of individual commissioners, as well as do more to publicize its intentions as it moves forward toward instituting regulatory reforms.
When it comes to the recent controversy over the NAIC closing some of its policy deliberations to outsiders—including state legislators, consumer advocates and the media—Mr. Dinallo said that under certain scenarios, “it might be necessary to close sessions about ongoing investigations and examinations. Some amount of privacy is not inappropriate.”