In what has become an annual legislative ritual, the New York State Insurance Department has announced that it will again ask the legislature to introduce its newest version of its life settlement bill. This year marks the fourth straight year that the agency has asked the legislature to pass its legislation in this area. In each of the three previous years, the New York legislature has not been able to pass either the Department’s bill or any other version of the comprehensive legislation. If spring is the season for hope, then I am sure that the Department hopes 2009 is finally the year that the legislature grants it the authority to bring a comprehensive plan of regulation to this growing marketplace.
Last year the Department’s proposal was moved aside by legislative officials and, instead, a “hybrid” draft, based upon a model act passed by the National Conference of Insurance Legislators (NCOIL), received the most attention from the state legislators. The word around the streets here in Albany was that the Department was unresponsive to concerns and suggestions about its proposal made by legislative officials, and, as a result, the legislative process went in a different direction. However, as the frantic session closed down in late June of 2008, no life settlement bill was passed.
During the off season the Department held a series of public hearings designed solely to gather input from consumer groups and persons who sold their life insurance policies into the secondary market. Ivan Lafayette, Deputy Superintendent at the Department and former long-time Assemblyman from New York City presided over the hearings. The Department’s announcement states that the current proposal was drafted following these public hearings. However, the press release is silent as to what information, if any, gained from the hearings became the basis for any new provisions in the bill.
As of the time of this writing, I have been unable to locate a draft of the Department’s proposal. However, the press release which announced the bill states that “the proposed legislation calls for licensing requirements for life settlement providers and life settlement brokers, as well as registration requirements for life settlement intermediaries. It also proposes establishing privacy protections and other safeguards for insured individuals and policyholders.” Superintendent Dinallo is quoted in the press release as saying that “this bill protects consumers by establishing a transparent marketplace with specific licensing, registration and disclosure requirements. That means consumers will be given the critical information they need to make a decision in a life settlement transaction, including the value of offers and counteroffers, the fees paid to life settlement brokers and the contractual arrangements among the parties involved in the transaction.” In a statement that is sure to anger the life settlement industry, the Department wrote in its press release that “life settlements can be ripe for abuse.”
Some of the other highlights of the bill are:
1. The disclosure of significant life settlement contract provisions. 2. The disclosure of affiliations or contractual arrangements among parties involved in a transaction. 3. A complete and accurate description of all offers and counteroffers relating to the sale of the life insurance policy. 4. A reconciliation for the policy owner showing the difference between the gross offer for the purchase of the life insurance policy and the net amount to be paid to the owner, including a listing of all fees and compensation to the life settlement broker and others. 6. Advising the policy owner that selling a life insurance policy could result in tax consequences and could limit the insured individual’s ability to buy life insurance in the future.
Finally, the bill specifically prohibits life settlement providers and brokers from engaging in stranger-owned life insurance (STOLI), a practice in which a life insurance policy is purchased for the benefit of someone, who at the time of policy issuance, has no insurable interest in the life of the insured individual.
The legislature has done little on this topic so far this session. With the massive looming budget deficit it is no surprise that issues such as life settlements have gotten little attention to this point. Nonetheless, after many years of intense debate over this issue, the time is past due for the New York legislature to authorize regulatory supervision over this fast-growing and sometimes controversial market. The best result is to finish a bill this session so that the bad elements in the life settlement market will be forced out and the good elements can thrive under the Department’s regulatory oversight.
CAPTIVE INSURANCESTILL
A GREAT IDEA
FOR NEW YORK
As I was reviewing the legislative introductions this week I noticed a sight that warmed my heart. On March 24, 2009 a bill which would authorize the formation of a captive insurance company by the New York State Thruway Authority (TA) was introduced in both houses of the New York legislature. The compelling idea of captive insurance is apparently alive and well in New York. This development came soon after I finished my column for the previous issue which dealt with a budget proposal to change the income tax status of privately held captives which derived over 50 percent of their income from non-premium sources. Such a proposal, if enacted could have a negative effect on the formation and continuance of New York captives. Just when I believed that New York didn’t appreciate the benefits of captive insurance, I spotted this hopeful sign.
The legislation, if enacted, would pave the way for the formation of the third New York public captive insurer – the first two public captives were formed by the Mass Transit Authority (MTA) and the City of New York. The type of captive contemplated by the Thruway Authority would be a broadbased captive model, housing a variety of risks, in a manner similar to the MTA captive. (The New York City captive was formed solely to house the residual risk to New York City due to the clean-up of the World Trade Center site in the aftermath of the September 11, 2001 terrorist attacks.) Technically, the bill amends Section 7002 of the Insurance Law to add the Thruway Authority, and its statutory subsidiaries, to the list of entities qualifying as an “Industrial Insured”, therefore giving them the right to form a captive insurance company.
The bill is primarily sponsored by the Chairs of the respective Insurance Committees in each house of the legislature, Senator Neil Breslin of Albany and Assemblyman Joseph Morelle of Rochester. Sponsorship by the committee Chairs is always a good indicator of a bill’s prospects for serious consideration and eventual passage. The introduction is made at the request of the Thruway Authority.
A review of the sponsor’s memorandum reveals that the Thruway Authority intends to place its self insured liabilities for property damage to its buildings and vehicles as well as third party liability, including automobile liability, into the captive. The TA also purchases insurance for some liability and loss in the traditional market. With respect to those coverages the TA is facing increases in its premium costs and reduced capacity. It is apparent that the reason the TA has requested authority to form a captive is the incredible success the MTA has had with its captive program. The sponsor’s memo reads as follows, “The MTA has successfully operated a captive program since 1997, which has resulted in an estimated savings of more that $248 million to the MTA from 1997 through 2006 it is anticipated that this legislation would result in reduced costs to the Thruway Authority.”
The TA is wise to invoke the example of the wildly successful MTA captive program as a justification for authority to begin its own program. The MTA captive was the first captive insurance company licensed in New York State. The license was issued on December 5, 1997 which, quite intentionally, was the effective date of New York’s first captive insurance law. I recall the date without looking it up as I cosigned that first license with then First Deputy Superintendent Greg Serio.
The licensing of the MTA captive was the culmination of a long and difficult effort to establish captive insurance in New York, which began as a dream of Senator John Dunne, former Chair of the Senate Insurance Committee in the late 1970’s. The New York Insurance Department consistently refused to support the idea of captive insurance in New York until 1995, when one of Senator Dunne’s protégés, Greg Serio became the First Deputy Superintendent of the Insurance Department. Through Serio’s advocacy, establishing captive insurance in New York became an important economic development plank in Governor Pataki’s transition plan for the insurance industry. By 1996, Vermont had risen to the position of the premier domestic domicile for captive insurers and was reaping a myriad of economic development benefits that could have potentially been New York’s, if we had ever enacted Senator Dunne’s dream twenty-years earlier. Despite the all-tooclose example Vermont had set we still had problems getting a captive law passed in New York.
That was until the day in early 1997 when I received an urgent call from Greg Serio that I was to proceed to the MTA offices in Manhattan to attempt to stop the MTA from filing a captive license with Vermont regulators. The officials of the MTA truly wanted to form their captive insurer in New York, but could not wait forever to take advantage of the significant benefits of the captive. MTA officials said they would halt the filing in Vermont until the end of the legislative session in 1997 to see whether we could get the captive law passed by then. If no captive law were passed here, the MTA would form one in Vermont. Armed with the formidable support of the MTA (and some clever placement of the captive bill inside the 1997 budget law) New York’s first captive insurance law was passed by the legislature on the last day of session in 1997. The MTA filed its application with the New York Department soon thereafter and the licensing process was completed on the effective date of the law.
Since that time the MTA captive has provided tremendous economic and risk management benefits to the MTA. The program and its leaders have received recognition and rewards from many risk management and insurance organizations. The savings to the MTA and its passengers have amounted to hundreds of millions of dollars, as recorded in the current bill’s sponsor’s memo.
I apologize for the history lesson, but I am proud of the small part I played in establishing captive insurance in New York. Captive insurance has been a valuable and important alternative risk management tool for many New York institutions over the past twelve years, both public and private. There are now nearly 50 captive insurers who call New York their home, providing insurance cost savings for their parent, millions of dollars in premium tax revenue, and immeasurable other economic development benefits to our state. The fact that another state authority, operating under a different Governor, has determined that captive insurance is a prudent and cost-effective way to solve its insurance needs, represents an enduring tribute to the power of the original idea — that captive insurance is right for New York.
I also applaud the TA for seeking to better manage it risk and to seek the flexibility and savings that captive insurance can offer. I applaud Senator Breslin, Assemblyman Morelle and the other sponsors for introducing the bill. I strongly urge the legislature to pass the bill.
While we’re at it, why don’t we finally authorize all New York public institutions to form captive insurers? Why should other authorities, counties, municipalities and districts be denied the potential benefits and flexibility that captive insurance can provide?
The insurance market will continue to harden in the future and prices will rise as availability will decrease. Expansion of the availability of captive insurance will significantly increase the ability of public entities to weather the current market.
Great ideas are the ones that can stand up to the test of time, just ask Senator Dunne.
DOCTORS ON THE
MARCH FOR MEDICAL
MALPRACTICE
INSURANCE REFORM
I have seen hundreds of groups at the New York State Capitol over the years, chanting protest slogans and carrying signs. In early March, the front steps of the Capitol building looked like the lobby of a country club as hundreds of physicians gathered to yell “enough is enough! The time is now”. The Doctors, who were motivated enough to take time out of their very busy day to travel to the capitol are angry and frustrated at the current state of the medical malpractice insurance system.
The doctors came to Albany to urge that their medical malpractice insurance premiums be lowered. The doctors were further outraged when they were informed that Governor Paterson was considering lifting caps on legal fees for medical malpractice suits.
Last year, the legislature passed and Governor Paterson signed legislation which prevented the Insurance Superintendent from increasing medical malpractice insurance rates. At the time the Governor stated that rates were suspended to give time to a task force on medical malpractice insurance time to develop a solution to the perennial problems that exist in this market. However, as the July 1st rate decision deadline rapidly approaches, no apparent progress has been seen from the task force.
The Medical Society has sounded the alarm that increases in medical malpractice liability rates have begun to result in access problems for New Yorkers seeking medical assistance. “We have seen the elimination of hospital obstetrical services and the closure of birthing centers in both downstate and upstate New York,” writes the Medical Society in a document describing its legislative program. “The time is now to rein in these outrageous liability costs.”
The anger level of the Doctors that gathered in Albany was most notable. Of all of the chronic problems that exist in the system which cause malpractice rates to be so high, perhaps the knowledge that state government may eliminate the caps on attorney fees in malpractice actions seem to have them the most incensed. The thought of trial lawyers getting higher fees for malpractice recoveries just pours gasoline on the fire.
“This is a slap in the face” said Dr. Ralph Messo a Staten Island pediatrician. “Its going to drive the premiums up and drive doctors out of the state where the rates are lower and where they can make a decent living”, Messo said.
Medical malpractice insurance will undoubtedly be a source of great attention this session. With little to report from the Task force charged with responsibility to propose a long-term solution to the issue, will Doctors again push to freeze rates? How will the insurers respond?
PRODUCER LICENSING
BILL INTRODUCED
On March 23rd, the Insurance Department’s producer licensing “program bill” was introduced in the legislature as S. 3551 – Breslin/A. 7129 – Morelle. The bill will further modernize the Department’s licensing process by:
1. creating three new lines of authority, credit insurance, crop insurance and surety; 2. requiring entities seeking to provide insurance agent and broker licensing courses to file for approval with the Superintendent of Insurance; 3. requiring independent adjusters to complete pre-licensing and continuing education courses; 4. granting the superintendent the authority to require an applicant for an Article 21 license to submit his or her fingerprints; and 5. permitting the licensing of non-resident adjusters on a reciprocal basis.
If enacted, the legislation would ensure that New York law will conform to the National Association of Insurance Commissioners (NAIC) Producer Licensing Model Act. This law would be the culmination of the modernization process that began in 2003. The sponsor’s memo reads “This bill builds upon the success of Chapter 687 of the Laws of 2003, and is a substantial step towards the completion of the licensing modernization process. The bill creates parity for resident licensees with non-residents who achieved reciprocity by implementation of the NAIC Producer Licensing Model Act.” Further, the memo reads, “this bill heightens the qualifications that individuals seeking to be licensed pursuant to Article 21 of the Insurance Law must meet. By increasing the qualifications, this bill ensures that licensees have the education and expertise necessary to perform their duties as licensees, thereby enhancing insurance consumer protection in New York State.”
I urge all producers to read the bill and comment to your trade associations with any concerns. More to come as this bill moves through the legislative process.
