Between the tenures of Eric Dinallo and Jim Wrynn, Governor Paterson appointed Kermit Brooks as the acting Superintendent of Insurance. The industry is very familiar with Mr. Brooks as he has served as the First Deputy Superintendent of Insurance since January of 2007. Prior to his service in the Department, he held the position as Deputy Attorney General for Operations under then Attorney General Eliot Spitzer. Before that he was a Counsel in the law department at Metropolitan Life Insurance Company.
Kermit Brooks was a key advisor to Superintendent Dinallo and was intimately involved in developing the Department’s position and policies during the economic crises of the past two years. As the First Deputy Superintendent he has been the Chief Operational officer of the Department and, as such, has an intimate knowledge of how the agency functions. Given this experience, he needs no time to “get to know” Department personnel or to play “catch up” on the major issues of the day. As a result, Brooks has had an immediate impact on the Department and the industry.
The NAIC has appointed Brooks to the position of Chair of the Life Insurance and Annuities (“A”) Committee, replacing Dinallo in that post. He has finalized a Memorandum of Understanding with the China Insurance Regulatory Commission, China’s national insurance regulatory body. Given the significant presence that many of New York’s insurers have built in China in the past decade, this MoU is an important step in enhancing the cooperation and coordination between regulators by facilitating the transfer of information on a regulated person or entity.
Brooks also jumped into the timely national discussion on the role played by rating agencies in contributing to the financial services collapse of last fall. He stated that insurance regulators are too dependent on ratings firms and need alternatives to companies like Standard & Poors and Moody’s Investors Service. He told Bloomberg.com “We’ve relied too much on rating agencies and in fact, in certain areas, we’re relying exclusively on rating agencies.” He also said that the Department was considering “a lot of ideas” including expanding the capacity of regulators to conduct their own credit analysis.
Brooks further issued a revised set of draft regulations on broker compensation, which had not been universally well-received up to this point. The industry is currently reviewing the new draft and early word is that there are still some problems which need work. Many industry representatives have long maintained that Brooks has been the driving force inside the Department in the development of this compensation disclosure regulation. It will be very interesting to see if the tone of the discussions over the regulation changes in any way now that he is in charge.
All eyes will be on the Department in the near future to see if there will be any changes in position, direction or rhetoric as a result of the new Acting Superintendent. Of course, tongues will continue to wag over whether or not Brooks will be given the full appointment by the Governor or will that go to someone else. The Acting Superintendent has publicly acknowledged that he would like the permanent appointment. However, until then, Brooks has made it clear that he has the will and the ability to act decisively and speak out on the controversial issues facing the industry. “If there is any message, it’s that I don’t view acting superintendent as a caretaker role,” Brooks told Bloomberg.com, “This department has a lot of balls in the air, and a lot of initiatives we’re pursuing.”
As a member of the club of former and current Deputy Superintendents, we always like to see one of us elevated to the top job. Such a move is a tribute to the quality and dedication to those persons who have served in that role in the Department’s proud history. As for Kermit Brooks, it was a busy month in charge and he will be of great value to the next Superintendent.
Industry Position Inconsistent on Federal Regulation
For many years, the national insurance trade associations have actively and vocally supported the creation of a federal insurance regulatory system through adoption of an “Optional Federal Charter” (OFC) for insurance companies. The OFC would allow companies to bypass the state-based insurance regulatory system currently in place. The argument is support of the OFC is that giving companies the option of dealing with one national regulator, instead of 50 individual state regulators would lower company costs, increase efficiencies and provide more consistency across state lines. Given the statements made by industry trade groups over the years in support of the OFC concept, one could reasonable believe that the industry would welcome federal regulation in its entirety. However, a recent development on the federal front gives rise to the belief that the industry position may not be so clear after all. This development begins with the Obama Administration’s issuance of its plan for the future of financial services regulation, which included the creation of a U.S. Consumer Financial Protection Agency (CFPA). In the legislation creating the agency, there appears an exclusion for activities involving the “business of insurance” from the authority of the proposed agency. While this express language would appear to conclusively take insurance out of the regulatory reach of the agency, the legislation also includes those who underwrite and sell “mortgage, title and credit insurance” within the scope of the proposed agency. The reference to mortgage, title and credit insurance has raised concern among insurance trade groups that inclusion of these specific areas of insurance could sweep other forms of insurance into the CFPA jurisdiction. The concern prompted a coalition of insurance industry trade groups to fire off a letter to the Chairs and ranking minority members of both the House Financial Services and the Senate Banking Committees asking for a clarification to be written into the legislation which would ensure that no insurance product ever ultimately come under the authority of the CFPA. Specifically, the letter states, the way the industry is interpreting the language of the current bill, to the extent that one is deemed a “financial advisor”, who “provides financial or other related advisory services” or “tax planning services”, these products and their providers would come under authority of the proposed agency.
The coalition letter further added that to the extent that the CFPA’s authority covers products that do not involve a direct extension of credit, “the slippery slope” debate over the intended scope of the proposed legislation will likely generate lengthy litigation where the courts will ultimately make that determination. Another problem with the legislation is that without sufficient statutory boundaries the CFPA itself determines what activity falls within the scope of “the business of insurance”. “Vesting the CFPA with authority to define the parameters of this term may lead to an expansion of the CFPA’s incursion into insurance, and any judicially-contested determination may be afforded administrative deference by the courts.”
The letter was signed by many industry trade groups including the National Association of Insurance and Financial Advisors (NAIFA), American Insurance Association (AIA), Property Casualty Insurers Association of America (PCIAA), Association for Advanced Life Underwriting (AALU) and my favorite, the American Council of Life Insurers (ACLI). As a strong proponent of state-based insurance regulation, I cannot help but chuckle that the letter’s signatory page includes some of the most vocal and strident trade groups supporting the Optional Federal Charter. That vocal and strident support indicated that those groups believed that federal regulation of insurance was a positive thing. So why are those same industry groups now so opposed to even the possibility that their member companies could be drawn under the federal umbrella?
Apparently, not all federal regulation of insurance is desirable to the industry. The message that may be taken from the actions of the trade group coalition is that when federal regulation works to the benefit of the companies, such as with an optional federal charter, then the companies support the measure. However, if the federal regulation is designed to protect the consumer, the industry stands in opposition to its application to “the business of insurance.” The industry trade groups should develop a plan to address the inconsistency in their positions in this important area to avoid such a message from taking hold in the ranks of both state and federal legislators and regulators. Such a message cannot work in favor of the industry in the future dealings with the federal government or its current state regulators.
New York Department to Hold Hearings on Suitability
The New York Insurance Department is jumping into the controversial area of the suitability of life insurance and annuity sales by announcing a series of public hearings to be held across the state between August 6th and September 16th. The Department will seek information from consumers, producers, companies and all others involved in the process of selling life insurance and annuities designed to assist the Department in answering the following question “Is new oversight or regulation required to protect consumers now that purchases of life insurance and annuity contracts have become increasingly complex financial transactions?
The hearings will focus on “suitability” or whether a particular product is the right one for an individual consumer. At the hearings, the Department will try to find out if there is a problem concerning unsuitable sales of life insurance and annuities in New York, and if so, what should be done about it. The Department is concerned that as these products become more complex insurers may not be sufficiently evaluating whether the products being sold to consumers, especially those sold to senior citizens, adequately meet the consumers’ needs, financial status, investment objectives, tax implications or other requirements.
It appears that by scheduling these hearings the Department is letting the industry know that it will never be adopting the NAIC model, and will, instead, attempt to fashion its own suitability standard. This cannot be good news for the life industry, who has unsuccessfully attempted to convince the Department to go along with the NAIC model for many years now. The result of these hearings could very likely be a new, far more consumer friendly regulation being proposed by the Department which will undoubtedly place additional and onerous requirements on the industry. This new proposal could come on top of what is already believed to be the most extensive consumer disclosure regulatory structure in the United States.
The Department is encouraging all market participants to offer testimony at the hearing. The hearings will be held on August 6th in Buffalo, August 13th in Albany, September 9th in Old Westbury and September 16th at the Department’s offices in New York City.
