I’ll bet that many of our readers don’t know that the Joe Morelle’s long road to becoming one of the most important people in government to the nation’s insurance industry could very well have begun as the result of a badly broken leg. The day before the start of classes for his junior year at Geneseo State, Morelle broke his leg in five places, which took him out of action for months. During the long days of his recovery, he approached then Senator Jack Perry and asked if he had anything for him to do because he was bored. Senator Perry gave him some part-time work on his staff which, eventually, led to a full-time job on his staff in Albany for three years. During this experience Morelle caught the public service bug and eventually ran and won a seat in the Monroe county legislature. He served in the county legislature for seven years before his election to the Assembly in 1990. Once in the Assembly, Morelle started a successful software company which he ran for about 11 years. This experience imbued him with the real experience of the challenges and frustrations of running a small business in New York, experience which he draws upon everyday in his current position. In the Assembly he chaired the ethics committee for about one year and then moved to the chair of the small business committee. In that role he was devoted to moving legislation that helped small business grow and prosper in New York and once sponsored and passed legislation that saved New York’s small businesses nearly $25 billion in taxes. He then moved to the chair of the tourism, parks, arts and sports development committee. In 2007, he convinced Speaker Silver to appoint him to the position of chair of the Insurance Committee. As it turns out, his “bad break” many years ago led directly to the insurance industry’s “good break” in 2007 as the Assemblyman told me that if not for the work he did with Senator Perry all those years ago, he probably would not have chosen government service. I recently had a chance to chat with Chairman Morelle in his Albany office on a dreary, rainy day. We talked about his career to this point, how a broken leg helped to shape his destiny, and, most interestingly to the readers of this magazine, about the insurance industry in New York and what that industry may expect from the 2010 legislative session. The highlights of our conversation are printed here.

PM: You have now had two full sessions now as the Chairman of the Assembly Insurance Committee.

 JM: It seems like just yesterday…

PM: and there has been a lot done. So what are your general impressions of the Insurance industry, where it’s going, how well it’s doing?

JM: That’s a great question. Because I have not served on the Insurance Committee before being named the Chairman, it involved a bit of a learning curve – I’m always on a learning curve – The first six months or so were really fascinating. It’s interesting, from a legislative point of view. There are a lot of issues to deal with. In my capacity as Chairman of the Tourism Committee, the issues were less policy oriented, and instead focused on the question “could you get enough resources?” The Insurance Committee, on the other hand, is one of the purer committees in terms of public policy, which I find interesting and it’s somewhat complicated. Insurance, when you boil it down, this is one of the most important aspects of any society. Most people may not like or want to deal with insurance issues, but you can’t build a building, you can’t build a house, live in a house, go to the doctor, or drive a car without some aspect of insurance playing a significant role in that. The actions of the Insurance Committee affect virtually every one of the 19 million New Yorkers, and I find the issues interesting and complex. A lot of policymakers have their eyes glaze over when you talk about indemnity issues, solvency, etc., but I actually am enough of a geek to actually find this all fascinating. I think the challenge which I really enjoy is looking at a problem from many different angles, and trying to anticipate all of the consequences of any action. We make every effort to make the right judgments because if we don’t, insurer insolvencies could lead to consumers being unprotected. In the securities world or investment world people understand that there is an inherent risk in that and you could lose your entire investment. In the insurance world, people buy policies to eliminate risk so, at the end of the day, this is not a question of whether you lose your investment, you could lose your house, or leave your family unprotected, financially, if you pass away. Thus, I believe insurance is a sacred agreement you reach to give an insurer your money and in return you get a promise that if there is an unfortunate event, that insurer will stand in for you from an economic point of view. That is a pretty significant responsibility for all of us in the regulatory and statutory part of this business. This fact underlies all of our deliberations on the Insurance Committee. I told a couple of my colleagues that I met with yesterday that it’s my job to unfortunately say “no”, which isn’t always the most popular thing to do, but hopefully the Speaker hasn’t regretted having me here to be the person who oftentimes has to say “no” to colleagues.

PM: From what I have heard over the last couple of years from the people I know in the industry and in government, the industry views you as someone who understands the business, as a businessperson yourself, and who understands the pressures of running a business in New York, especially. Do you find that there seems to be a growing discontentment in the insurance industry? Are people coming to talk to you, are they getting angry about the developments as far as taxation and assessments?

JM: Well, certainly last year was a difficult time because of the increase in a number of the taxes that are in the industry, whether it was the covered lives assessment or the 332 assessments, etc. So I think that the industry felt, and I agree with them, that they bore too much of the burden last year in helping to address some of the State’s financial problems. So far this year, we have not had those kinds of pressures, but people are still obviously paying a much higher base now when it comes to taxation. So I think those issues will continue to persist. I am particularly troubled by the use of the 332 assessments which I don’t believe are being used the way the law was originally written , and obviously, there is some litigation that is going to address those concerns and hopefully put some end to the debate, at least about how we use them properly. I think there is general concern about the reaction to a whole host of insurance issues by legislators who are feeling pressure at home about increasing premiums; particularly health insurance, how to deal with that, and sometimes those frustrations manifest themselves in public policy proscriptions that aren’t necessarily appropriate. Legislators get elected to solve problems, to do positive things. I like to say legislators don’t typically run, telling voters that things are going to get worse and that they should expect less from government. It doesn’t work that way, because it leads us to make commitments that we can’t honor, and that, I think, is worse.

PM: What are your thoughts about the New York Insurance Department?

JM: The New York Insurance Department is outstanding. The Department is populated with many people who have served there for many, many years and who probably could have gone and found themselves much more financially fulfilled in the private sector, but have really stayed and have done the job. I think they are amazing people. We are careful to try to strike a balance, and that’s why we work close with the Department. I have just enormous respect for the people there. We may not always agree. You know I have risen in the past concerns about producer compensation disclosure. I know that last year when the original regulation came out, I had lengthy conversations with the Department, and they went back and revised them. I think they are better now. I know that everyone is not entirely happy. So there are some policy issues with which we will disagree, and we will have candid conversations, but generally, I can’t say enough in terms of how I feel about the professionalism of the Insurance Department.

PM: The issue of prior approval for health insurance rates is one of the hot topics this session. I noticed that you recently wrote a letter to your hometown newspaper, the Rochester Democrat and Chronicle, expressing your views on prior approval. Why don’t you summarize those here and tell us what you think may happen this session.

JM: I have always been concerned about how to balance the competing interests in this area. On the one hand, the public growing more and more convinced that health insurance companies are making a lot of money on their backs and the rates are higher than they need to be from an actuarially sound point of view. On the other hand, the insurance community is suggesting that rate setting will lead to problems in the long term because you can have a rate setting process that is political or a rate setting process that takes so long that people end up trying to game the system to get their rates approved. My concern is that if the prior approval is not done responsibly it will be illusory in terms of how much of a benefit it provides. If people believe that having a rate setting process by the Department of Insurance is going to bring down rates, and if they are not looking at the level of medical costs, then they are going to be very disappointed. By the same token, I am very concerned about how quickly health insurance rates are rising. A prior approval process can go a long way to resolving much of the skepticism of the general public about the intentions of insurance companies and what motivates them in setting rates. If we bring more public scrutiny to the rate setting process, it could help the public understand why rates are so high and insurers will now be able to say this rate increase was vetted by the Insurance Department to be actuarially sound. Thus, as I indicated in the article, I would support prior approval, but only if we can create a system that meets a couple of different goals. First of all, there would have to be a great deal of transparency in the rate setting process so that a request can’t go into a “black box” and come out significantly different without a valid explanation. For example, if an insurer requests a 10 percent increase on a particular line of business and the Insurance Department approves a 4% increase, then consumers, observers, policymakers and others need to be able to look at that request and find out why was that reduced. The bill I am working on right now will have standards to ensure that the rate approval process is highly transparent. In addition our bill will have a peer review panel that would look at these requests and make non-binding recommendations to the Superintendent before a final decision is made on the rate request. I believe these measures would aid in building the public’s confidence that those rates are appropriately justified. The overall goal of any prior approval legislation would be to ensure that the rate is adequate. We know that rate adequacy is not an issue that the general public focuses on, but those of us involved in the supervision of insurers must ensure that the rate be sufficient to maintain the insurer’s solvency and provide support for its ongoing business concern. Secondly the bill will ensure that the rate approval process is timely. There will be a very strict series of time guidelines for the Insurance Department’s processing of the rate request. I think we have come to the point where we will have a very tight timeline, and we will also have a deemer provision which essentially says if the Department cannot conclude its business in a timely fashion, the rates are deemed approved. I am currently working on a draft of the bill with Senator Neil Breslin, Chair of the Senate Insurance Committee.

PM: And who would be on this peer review panel?

JM: That would be chosen by the Department as I envision it, but it would have to be people who have real experience as actuaries, or have real experience in the finances of insurance and understand the rate process. The review is different from external review in that it is not binding, but it would be a way of – and the insurance companies would trigger when it is used – and they would furnish, a their cost, the peer review process. Some people are less confident than I am, that the peer review would actually increase transparency, but I have some faith that if the people chosen have a public responsibility, have industry ethics, that they have to follow business ethics, they’ll do the right thing, they’ll make the judgments they need to make. We would make the deliberations of the peer review subject to Freedom of Information requests, they would be subpoenable should there be an Article 78 proceeding. My goal is to ensure that any rate requested is justified, and that the Department does not exercise is discretion in a manner that is political. If people can’t abide by a system like this, then I question whether or not I can rely upon the various claims on both sides. With respect to the medical loss ratio standard, the Governor has proposed that it be 85% for small groups and individual policies. The one concern that I have expressed to everyone is that if in that 15% administrative allocation, if taxes are considered in there, as they have been up to now,( e.g. 332 assessments and the premium taxes), then a significant portion of their administrative allotment is completely out of their control. I would want the determination of medical loss ratios to be exclusive of taxes and assessments. That may be without precedent, but I believe that it is unfair to insurers who are able to control their marketing, claims processing and other such administrative costs, but they have no control over taxes. If we don’t exclude taxes and assessments from the calculation then what we are really saying to insurers, is if you need to pay 85% of your premium dollar on medical costs, and 5% let’s say on taxes, well you are really only getting 10% of each dollar to actually run your company. It is my idea to call people out, which may make people uncomfortable, by saying, “OK, insurer, you made the claim that you can live with 15% for administrative expenses, as long as taxes aren’t included. OK, Department, if you want the companies to control their cost, then judge them on those costs they actually control, and take out the factors over which they have no control.” I am interested to see what the parties say to that.

PM: Well I think that that approach would be novel and that may help with the carriers come to terms with the concept of prior approval if they had some relief on what got included in the loss ration calculation.

JM: Frankly, I think that one of the consequences of it is going to be that the legislators would now be aware that 332 assessments and taxes are outside the medical loss ratio, they may be more inclined to be careful about employing them. You couldn’t just bury them in the administrative portion of the loss ratio any longer. We could look at this in a few years and if the companies are routinely able to make the 85% and there is an argument that it needs to be increased, we could always entertain that. I also want to get to a much cleaner definition of medical loss ratio so we can make determinations about wellness programs and other things which hopefully will, in the long term, reduce costs of health insurance, and that’s where we should want to be engaged.

PM: Let’s talk about timing and process. When do you think your proposal will be ready for the light of day?

JM: Well that’s a great question. As you know the Governor has put his proposal in the budget so I would like to do a stand alone bill, but I would like to do it before the budget so that it doesn’t cause confusion. The Governor has placed a $70 million target of savings to Medicaid costs to be achieved through prior approval. Obviously, I have to continue to consult with Senator Breslin and the Governor’s office about this. I would like to make sure that whichever proposal is advanced, I want it to be vetted through the insurance committees. I don’t mean this in a negative way but I would prefer not to have ways and means staff the exclusive arbiter of this public policy just because there is a dollar amount attached to it. I do think that this is one of the more troubling aspects of the Governor’s proposal is that by putting it in the budget you intentionally take the focus away from what should be the appropriate statutory and regulatory framework and, instead, it becomes more of a conversation about what are the dollars that will be produced as the result. When you start doing it that way that’s when you run into trouble about what your policy should be.

PM: Will the Department be assisting with you and Senator Breslin in putting your proposal together.

JM: Well, I have met with the Governor’s office and I have met, repeatedly, with the Insurance Department and the Superintendent, who frankly has been just a great partner in this. Our goals are all the same and should be the same and that is to make sure that consumers get a fair premium, that meets the cost and that there should not be politics in the process, and it should be done in a timely fashion. I think we all agree upon definitions. So I think he’s just been great to deal with. So he’s been assisting with ideas as I have raised them. Troy Oeschner and his office have also been very open. I have met with consumer groups and tried to keep them apprised of my thinking on the subject and obviously I am in partnership with Senator Breslin. I am hopeful that we’ll all come together and I think the system will change. I just want it to change for the better.

PM: Let’s shift to another topic which seems to be on the mind of the auto insurers. You held a roundtable recently on the subject of no-fault fraud. This seems to be an issue that is back on the front burner. What did you learn from the roundtable?

JM: I think it is a little broader that looking at just fraud although fraud is clearly a significant part of the conversation. There are people in the medical community, in the legal community and in the insurance community that have reservations about the system as it currently exists, and while they may not come to the same conclusions about what those changes should be, there does seem to be some broad consensus that changes need to be made. Now, many of the claims, even under no-fault, are processed and are resolved without significant dispute, but there is enough that are being disputed that end up in the courts or end up in arbitration that I am persuaded that looking at the system makes a lot of sense. The question is how do you get everybody in a place where they can agree on some reforms? It is not always easy, as you know, to get the legal community and the trial bar, the medical community, the doctors and other providers and the insurance community in the same place. I think many of the things they want to do are not mutually exclusive, I think we’ve gotten, sometimes, in our politics, in a place where someone will oppose a reform, not because if effects them, but because they haven’t gotten anything that they want in the mix. Hopefully we’ll try to look at this. I think a couple of things are clear. I think there are far too few cases going to arbitration. From the legal community’s point of view they are concerned about collateral estoppel issues, and I think we may be able to try to address those in a reasonable way. I have spoke with the Department about suggestions I have received concerning mandatory arbitration for cases under a certain amount to keep them out of small claims court. I think that may be an avenue that we may want to explore. The legal community and the medical community are also concerned that some of the soft tissue injuries are not included in the serious injury definition. Their point is that when the statute was designed, the diagnostic tools available to look at soft tissue injuries were not available, such as MRI’s and CAT scans. We are a long way away from proposing change the definition at this point, however. We must also be very concerned about what appears to be certain anomalies in the level of premiums in certain areas of the state. It appears that there is something going on which should be examined. This is where the fraud question most likely comes in. If you review the number of visits to a health care provider over the five previous years in, say, Rochester, you will see that the number of visits, per claim, went down about 29%. In that same period, in the Bronx, that number went up 107%. Unless the injuries in the Bronx are, for some reason, more severe than they are in Monroe County, it seems to me that something else is at play. That is when you get into the question of medical mills; you get to the question of whether or not people recognizing the limits are prescribing health care that will just get to the limit. So there are real questions about the so called “runners”, the socalled “staged accidents”. We have to really take a serious look at that. I have been gratified that Carl Heastie, who represents the Bronx, has been very, very interested in this issue and looks to work with us on it. We welcome his input. If there are explanations other than fraud at work, people need to bring these to the table, and say “this is why the Bronx and Brooklyn are much higher. It doesn’t have anything to do with fraud; it has to do with other issues which you haven’t looked at.” I would obviously be prepared to look at that. In any case, this is why I don’t think all of these issues are mutually exclusive, maybe we can get them all on the table and come to some agreements on some of these issues and, in doing so, break through the dynamic which has existed here far too long.

PM: What are your thoughts on the status of the life insurance industry?

JM: I’m really pleased that you have not seen life insurance companies face the kind of problems that the banking industry has seen. They are solvent. They have gone through difficulties. They have a list of concerns. The biggest concern they have is the Interstate Compact.

PM: Is this the year for the Compact?

JM: Well, interestingly enough, recently, the Department—which for a couple of years was neutral at best on this point—has, and I don’t think I’m telling tales out of school, raised much more serious concerns about it. I think we need to work through some of the issues they have raised and go back and try to make some independent judgments on whether we agree with them. Unfortunately, this development makes it less likely that it will happen this year. I am always sensitive to the fact that the life insurance community— as well as the entire insurance community— is very, very important to New York State’s economy, and they operate in a very strict regulatory environment.

PM: The agents and brokers and their various groups are now probably already on the phone talking to lawyers about the newly effective producer compensation regulation. Have they talked to you about it?

JM: If it’s determined at some point, obviously by the courts, that the Department has overstepped its authority and that they stepped into areas that are reserved for creating statute, we will gladly take this up over the next year or so and help come to some conclusion. I’m not sure I would have reached entirely the same conclusion the Department has reached, so it might look different than what they are proposing, but we will obviously see as time goes on how that plays out.

PM: Another hot area for this session is in the area of medical malpractice insurance. The insurers want to see some changes in the law and, of course, physicians are at their wit’s end with rates. There are a number of proposals floating out there. What do you think the industry and the doctors can expect out of this Session?

JM: Well, last year I voted against the freezing of the rates and was opposed to it the year before when we did it as well. I’m sure this was the cause of great consternation among some people. My general philosophy is that we would be much better off in this world acknowledging when we have real problems. The current system may not be fair, and certainly needs some changes. Rates should be commensurate with what the costs of the system are, and obviously we have not done that. I know it’s painful, but I think freezing the rates creates a greater opportunity for crisis, and it makes people comfortable to the point where they feel they don’t have to confront the structural problems in the system. Hopefully, we will get to an end of doing that. The Superintendent has raised some very thoughtful ideas relative to creating a Rate Service Organization. Clearly, we have to deal with the MMIP issue. We are not getting new carriers into New York if there is exposure to them from the pool, meaning that they become part of the solution when they weren’t part of the problem. We have to clear out MMIP and figure out where to go from there. I think it’s possible to do many of these things without touching the third rail, at least right now, of tort reform. This would be vigorously opposed within some quarters of the Legislature, so I don’t think we need to do that, but we do need to get to a system that is far more appropriate than the one we have.

PM: Are there any issues that are important to you that you may be raising this year that I haven’t asked you about?

JM: Actually, we are continuing to be concerned about exposure for homeowner’s on Long Island and New York City in terms of homeowner’s insurance. A couple of years ago, we passed legislation making NYPUIA permanent, providing wraparound policies to make it easier for carriers to be able to share some of the risk. I was more hopeful that this would address the problem that it appears to have. We are continuing to look at that issue. Whether or not that will result in legislation this year, I don’t know, but we are clearly going to focus on addressing it. We are looking at some of the challenges that have been presented by the Liquidation Bureau, so we may address some of their concerns this year.

PM: What are the issues presented by the Liquidation Bureau?

JM: Issues related to the guarantee fund and issues presented by the Estate of Executive Life of New York. We have been in touch with Dennis Hayes, Special Deputy Superintendent for Liquidation, and he is coming up with some recommendations. I know it’s an issue we will have to deal with.