As part of the cost saving component of its plan the Assembly proposed to merge or consolidate several agencies, which, if enacted, would ostensibly save a cumulative $32 million. One of the proposed mergers would be the combination of the Insurance and Banking Departments into a new “Department of Financial Services.” The proposal contains little detail about how the merger would be accomplished or where the savings would come from. Nonetheless, given the magnitude of the current fiscal crisis and the current superior position of Speaker Silver, the merger proposal has to be taken very seriously.
The merger of the Banking and Insurance Departments has been discussed in New York for many years. The discussion took on new life after New Jersey merged those departments in the mid-90’s. When Neil Levin became Superintendent of Insurance immediately after serving as Banking Superintendent in 1997, many people believed that move was a signal that Governor Pataki would seek to merge the two departments. Indeed, there were high-level discussions about such a merger at the time but they did not lead to any public proposal due to perceived opposition by insurers and insurance producers.
The Pataki administration again began high-level discussions about a merger in 2002-2003 because the funding base of the Banking department, namely New York chartered banks, had significantly diminished as many New York banks converted into federally chartered banks. It was predicted, at that time, that the Banking department would eventually need to be funded from general fund monies and a merger would essentially allow Banking department functions to be financed by insurers. Ultimately, Governor Pataki decided not to pursue a merger. Speculation about a merger of the two agencies took on new life when Eliot Spitzer created a “blue-ribbon” panel to examine and recommend modernization of New York’s financial regulatory system and appointed Superintendent Eric Dinallo as its leader. Dinallo was not shy about his admiration of the British system of financial regulation and many thought one of the goals of that group would be to recommend that all financial regulation take place in one agency with Dinallo to be its head. The idea faded after Governor Spitzer resigned. This is the first time I can recall that the proposal originated from the legislature. I have always thought that the merger of the two departments was an idea that always sounded better that it could ever possibly work. The benefit, other than the predicted financial savings, would be placing all financial regulation under one roof. Banks are financial institutions and insurance companies are financial institutions so why not regulate them within the same agency. However, one doesn’t have to dig very deeply to find problems with that logic. The banking department doesn’t just regulate banks but also foreign agencies, representative offices, savings institutions, trusts, credit unions, mortgage bankers and brokers, check cashers, money transmitters and licensed lenders. The insurance department doesn’t just regulate insurers but agents, brokers, consultants, adjusters, HMO’s, fraternals, and risk retention groups. The skills required to properly regulate these diverse institutions are not the same. The statutory and regulatory schemes are quite different and not easily learned. Management and training functions would remain separate. You could not have integration of the examiners into the same bureau. It would certainly be problematic to someday have banking examiners supervising insurance examiners and visa versa.
Thus, we would not expect any noticeable degree of symbiosis from such a merger. In fact, my observation of other states which have placed both regulators under one roof, such as New Jersey, Florida, and Vermont, is that there is little or no natural cooperation between the banking and insurance regulators. It appears that you simply have two agencies which exist separately within the same building.
Of course, with such a move, political factors should be taken into account. How will the respective industries perceive such a merger? Will they feel that they will get less attention and response out of the merged agency? Many insurers have voiced concern about the speed of policy and rate approvals. Will the complication of a merger further impede the insurance department’s reform efforts in this area?
Will the cost savings be as great as predicted? What are they? At the very least the assembly should release the cost saving analysis. In addition, given the relative sizes of New York’s insurer community and New York’s banking community, will insurers be subsidizing the banking regulatory process? All of these questions must be answered prior to this provision being enacted into law.
The problem is that inclusion of the proposal into the budget offers little time to properly vet all of these issues and examine them outside of the context of raising dollars. Insurers should be very concerned and should mobilize quickly.
