According to Wikipedia, the term “philosophy” means “the study of general and fundamental problems concerning matters such as existence, knowledge, truth, beauty, law, justice, validity, mind and language [through a]critical, generally systematic approach and its reliance on reasoned argument.”

When I found out from a reliable source in the summer of 2006 that someone named Eric Dinallo, a philosophy major, educated at Vassar College, would be the next Superintendent of Insurance under Governor-to-be Eliot Spitzer, I wondered how someone with a classical education in philosophy would fare as the premier regulator of the “nuts and bolts” insurance industry. With the benefit of two and a half years of hindsight, I can say that Eric Dinallo, the philosopher/regulator, who has had to weather the untimely political demise of his friend and Governor who was elected with the largest percentage of votes in the history of New York, at the same time that the nation’s financial markets were collapsing on a scale not seen since the 1930’s has done quite well. Whether or not his background in philosophy helped him survive such cataclysmic changes is a question that only he can answer. What I know for sure is that there are not many philosophers in the insurance industry, and thus Dinallo’s approach and perspective on his job and his industry has been unique.

By now most of the readers of this magazine have heard that Superintendent of Insurance, Eric Dinallo will resign his office effective July 3rd after nearly 30 months on the job. While many past Superintendents can point to the scars they carry from great crises that they faced during their time in office, such as the Empire crisis during Superintendent Curiale’s time or the aftermath of the tragedy of September 11th, 2001 for Superintendent Serio, no previous Superintendent in the modern era has had to face the broad-based, deep and sustained economic meltdown faced by Superintendent Dinallo. In addition to his philosophical training; he came to the job with the equally unusual background (for Insurance Superintendents) as a criminal prosecutor. When these qualifications are combined with the fact that he had precious little (9 months) actual work experience in the insurance field, Dinallo came to the office with a very fresh perspective, determined to push the insurance industry to fundamentally re-examine its both its role in the modern financial marketplace and its traditional relationship with its primary regulator.

As the former Chief of the Securities Bureau of the Attorney General’s Office, Dinallo had worked closely with Governor Spitzer and convinced the then Attorney General that the largely dormant “Martin Act” still had teeth and could be used by the New York Attorney General to investigate and prosecute wrongdoing on Wall Street. Dinallo was right about the “Martin Act” and the Wall Street prosecutions helped to vault Eliot Spitzer into the national spotlight. He left the Attorney General’s office to work for Morgan Stanley from 2003 to 2006 as its chief of compliance and, at the time of his appointment was the General Counsel for Willis Group Holdings, the world’s third largest insurance brokerage. Dinallo’s position as one of the architects of Spitzer’s rise to national recognition plus his private sector experience made him a logical choice to run an important agency like insurance. His experience as the top deputy to “the Sheriff of Wall Street” however, had many in the insurance industry worried. Superintendent Dinallo arrived at the Department on January 22, 2007 and it was apparent from the first day that he would make the “Eveready Energizer bunny” look a little sluggish. He made it clear to Department staff that he was looking to accomplish a great deal in a short time and that he wanted to redefine the relationship between the insurance industry and its regulator to one more akin to the “principles based” scheme that exists in Great Britain.
Dinallo made his presence felt on the industry immediately with his professorial style and his willingness to “think out loud” by raising provocative and controversial ideas in order to stimulate debate and discussion. His apparent willingness to discuss concepts that many in the insurance industry believed were long settled revealed his philosophic desire to question fundamental truths. For example, in one of his first speeches to the life insurers he called for a re-examination of the concept of insurable interest and its continued validity. Considering that the life insurers were in a heated battle at the time with the life settlement industry over the scope of insurable interest, the announcement was not well received. When he raised other such questions about other basic insurance concepts he left many in the industry, and the Department, with an uneasy feeling in the beginning. Further, his somewhat obscure Greek mythological references had many seasoned department staff and company representatives scrambling for their old college textbooks. On one occasion, he analogized a situation to the time when Copernicus’ heliocentric model of the universe replaced the Ptolemaic theory of the universe. This reference confused many who ran back to their computers to find out what he meant, and were thwarted by the fact that they were unaware that Ptolemy did not begin with a “t”.

Few knew what to make of the new Superintendent, but it was certain that he was unlike any of his predecessors and he was on a mission. As we all got to know him, the halls of the Insurance Department, as well as those in the private companies, buzzed with talk of “11 principles” and debates about whether the “British style” system could work in the complex regulatory system in this country.

Early in his tenure, he showed a penchant for shaking up the status quo when he announced that he had effectuated the largest regulatory settlement in the United States by brokering a $2 Billion insurance agreement settling the longstanding legal dispute between Larry Silverstein and the insurers of the World Trade Center site. The ongoing battle had hindered re-development of the site, and in Dinallo’s words was “a tarnish on the insurance industry, a tarnish on the downtown real estate market, and a tarnish on this agency.” Several months later, federal court transcripts were released revealing that insurance company lawyers complained to the federal judge hearing the case that they felt they were “bullied” and “threatened” by the Insurance Department into the settlement. Despite the private complaints of the insurers, a previously intractable problem had been resolved.
Dinallo was also picked to be in charge of a three-agency effort to implement the ambitious reforms called for in Governor Spitzer’s 2007 Worker’s Compensation Reform Act. Dinallo marshaled the forces of the Insurance Department, the Worker’s Compensation Board and the State Insurance Fund to develop significant reforms such as a “rocket docket” to speed the adjudication of injured worker claims. Further, at the department devised a new rate-making system for insurers designed to be more individualized to each insurers cost structure and experience. The New York Compensation Rating Board (NYCIRB) would no longer file for a rate for the entire industry but instead would file industry-wide loss cost numbers, with individual carriers making their own rate filings which utilized those loss cost numbers. Finally, the Department has worked diligently to develop objective medical guidelines for disability determinations which, when implemented, should provide consistency and certainty to injured workers and their employers. The result of the work is a continuing decline in the cost of Worker’s Compensation Insurance for New York employers and quicker, fairer, adjudications for New York’s injured workers.
The next major item of his tenure was the crisis in the bond insurance market. What had traditionally been a safe, secure and profitable business of insuring municipal bond obligations became destabilized as the underlying residential mortgage obligations that the industry had recently begun to insure defaulted on a massive scale. Faced with the impending insolvency of the critical sector, Dinallo facilitated the infusion of more than $15 Billion in new capital for the bond insurers and encouraged two new entrants into the market. Further, the Department spearheaded the split of MBIA into two entities, one to insure the safer municipal bonds and another to operate in the structured financial markets. The Department also actively interceded into the affairs of FGIC and Ambac to allow them to remain in the municipal bond market.

The problems in the financial guarantee market brought Superintendent Dinallo into the national spotlight. In the midst of a precipitous drop in the stock market due to the problems with the bond insurers, Dinallo announced that he was putting key financial players into one room at the Insurance Department to discuss a private solution to the crisis. The popular and controversial Jim Cramer of CNBC featured Dinallo on his show as the person who would save the bond insurance market. In response, the market jumped several hundred points. Perhaps in response to the many inquiries asking how he was going to solve the crisis, the Department then issued a curt statement that a potential solution may not be immediately forthcoming and would take some weeks or months to develop. Responding to this news, the stock market dropped several hundred points in response. The activities of the New York Insurance Department were front and center in a major national news item and Department activities were directly causing movement in the financial markets. Nonetheless, the intervention by the Superintendent and his Department to shore up the bond insurance market allowed the continued availability of bond insurance to thousands of municipalities and protected thousands of holders of existing insurance contracts.
While the bond insurance crisis was unfolding, Superintendent Dinallo took the controversial move of proposing to lay several regulatory “principles” on top of New York’s complex regulatory structure. The proposal was greeted with great concern on the part of industry officials who were apprehensive of placing more discretionary control in the hands of the Insurance Department. Many meetings were held with the industry to work out the issues, but resolution of has not been forthcoming.

This “principles-based” proposal was incorporated into a larger mission he received from Governor Spitzer in the summer of 2007. Dinallo was appointed the Chair of the Commission to Modernize Financial Regulation, a “blue-ribbon” panel made up of the movers and shakers of the securities, banking, insurance, legal and political worlds. The Commission was charged with developing a more modern and efficient financial regulatory system designed to enable the New York financial marketplace to maintain its global dominance in the face of stiff challenges from other up and coming financial markets such as the one in London, England. The panel was announced with great fanfare and a great deal of work was expended by Department staff and industry officials in pursuit of its mission. However, due in part to the untimely resignation of Governor Spitzer, the severe meltdown in the financial markets, and perhaps an overly ambitious mission given the limits of state government control of the financial sector, the Commission floundered and never issued its report. In 2007, Dinallo set sail into the murky waters of medical liability insurance reform. Intent on accomplishing the seemingly impossible task of reforming the state’s medical liability insurance structure, he was appointed, along with the Commissioner of Health, as co-chair of a medical liability task force. However, the issue proved to be far more intractable than was indicated in the Department’s initial announcements on the matter. Despite much activity and the discussion of many proposals, such as a “superfund” mechanism for victims of medical negligence in the obstetrics field, the task force has developed no significant proposals for reform. In the summer of 2008, the state legislature passed a law which specifically prevented the Superintendent from raising the medical liability insurance rates for that year. Lack of progress on this issue ensures that it will be among the first the new Superintendent must face. Superintendent Dinallo’s busy agenda also included work on the issues of Contract Certainty, Agent and Broker Compensation, Life Settlement regulation and auto insurance. Further, Dinallo oversaw a restructuring of the infamous Liquidation Bureau and has dealt with the rapidly declining fortunes of the Executive Life of New York Reorganization.
Like other Superintendents before him, Dinallo pushed for the authority to “prior approve” health insurance rates. The expense of Health Insurance continued to rise during his time in office, despite the fact that he ordered the Department to increase its vigilance in the area of health insurance rates. Recently the Superintendent used his current regulatory powers to order a massive $50 million refund to thousands of small business customers of Oxford Health Insurance Co. in the New York City metro area when the company’s loss ratio fell below 75 percent. While the Department continued to work to expand Healthy New York, and held hearings on problems with out-of-network coverage, little progress has been made with the concept of Universal Coverage.

On the international front Dinallo developed several Memoranda of Understanding Agreements with regulators in the United Kingdom, France, Germany and Bermuda to enhance the oversight of global insurance entities. Despite many successes on the matters described above, Eric Dinallo’s enduring legacy will be the critical role he played in the collapse of AIG, and the resulting meltdown of the financial services industry. In September of 2008 he was called upon by AIG officials to help address what had become a serious liquidity problem due to massive losses the company was taking on financial instruments known as “credit default swaps”, sold by the Financial Products Group (a non-insurance entity) to cover mortgage- backed securities. Dinallo and the Department worked feverishly on a private sector solution, similar to the one deployed in the bond insurance matter. However, as the nature and extent of the company’s obligations became apparent, it became clear that a commerciallyfinanced reorganization of AIG would not be possible. The United States Treasury interceded with $85 billion to shore up the company’s finances to protect the company’s counterparties and its 74 million customers, worldwide. Eric Dinallo was named by the National Association of Insurance Commissioners (NAIC) as the chair of its task force to oversee the sale of AIG’s assets, whose work continues to this day. The collapse of AIG thrust Eric Dinallo the national spotlight, once again. When many in Washington were stunned by the financial giant’s rapid decline, Dinallo swung the New York Department into action. A circular letter was issued announcing that the Department would undertake regulation of the particular type of credit default swap in which one of the parties owns the underlying debt obligation. Eventually, the federal regulators began to move to take control of the swaps, perhaps in response to the actions of the Department, and by November Dinallo announced that the Insurance Department would withdraw its circular letter. To this date however, the federal government has not determined how it will get control of these instruments in the future.
Throughout his time in office Eric Dinallo testified before Congress 11 times. He was a regular source for the press to consult on the complicated financial matters underlying the source of the nation’s financial woes. Many in the regulatory community and the insurance industry, however, will always remember that throughout the financial crisis, Eric Dinallo remained a vocal and strong advocate for the state insurance regulatory system and the quality and health of the insurance industry. He clearly pointed out to critics of state regulation, who attempted to seize upon the AIG disaster as a reason to eliminate state insurance regulation, that it was the financial strength and security of the AIG insurance companies that gave the company any hope at all of recovery. He has consistently touted the capital and reserve requirements of state regulation as sources of pride. The AIG crisis and its aftermath, to borrow the words of the great Winston Churchill, was Eric Dinallo’s “finest hour”.
In his announcement of Superintendent Dinallo’s departure from office, Governor David Paterson said: “Under Superintendent Dinallo’s leadership, the Department has effectuated the largest regulatory settlement in the U.S., played an integral role in the reform of the Worker’s Compensation System and facilitated more than $15 billion new capital for the bond insurance industry. Eric has earned the reputation as a national leader in the insurance industry, and I want to thank him for all he has done at the Department to promote a competitive marketplace while also effectively protecting New York’s consumers. When he started in office, he served one Governor, and then had to adjust to serving another. When he started in office, no one could have predicted that average Americans would be discussing “credit default swaps” and municipal bond insurance in coffee shops and around kitchen tables. During his time the Dow broke over the 14,000 mark and dropped to 6600 as well. He has covered a lot of material in 30 months. He once promised me that working with him for two years would seem like four. While I chose not to take that ride, and part of me will always wish I had, I can now see what he meant. His energy and enthusiasm has reinvigorated an industry and a Department who now can lay claim to being the only stable sector in a ravaged financial services industry.

There has been much speculation about his future. Many have reported that he is contemplating a run for the office of Attorney General, in the event that the current Attorney General runs for Governor. In any event, we know for sure that his immediate future will find him as a professor of finance at New York University. His style will be well suited to the academic pursuits, but his love and desire to be involved in the middle of the great public policy debates of the day will not keep him away from public service for long. Of all of his accomplishments as Superintendent, my best memory of Eric Dinallo is the kind and professional way he treated those of us Pataki appointees during the transition in early 2007. He promised us that he would not make decisions based solely on political party affiliation and he was true to his word. Each person was evaluated on the merits, and treated fairly. I learned that there were certain principles he held that were greater than party, and I will always be grateful for that. Not bad for a philosophy major.