Setting the Agenda: Insurance and Finance

Written by Adam Janos on . Posted in Banking/Insurance.

A New York City taxi is caught during flooding from Hurricane Irene (Photo: Scott Witt)

The relationship between insurance companies and the state was heated at times last year. The Department of Financial Services (DFS) issued online report cards for insurance companies based on their response record in the wake of Sandy, a measure that drew the ire of those in the industry who already felt overburdened by the workload the storm had caused.

Meanwhile, the state Senate and Assembly hit an impasse on regulatory measures and consumer protections, with the Assembly majority pushing to simplify homeowners’ insurance, and the Senate pushing to shore up business-side vulnerability by directly addressing the laws surrounding automobile fraud. Neither side saw their priority bills passed in the other’s house. Still, there is optimism on both sides that some of the prime issues for both the finance and insurance committees can be addressed in the coming session.

Some legislation in these areas did move through both houses and now awaits the governor’s pen. Among these was the certificate of insurance bill, which mandates that insurers issue to their clients a one-page summary of their policy, so as to simplify the terms of what are generally long and complex contracts into a form that is comprehensible for the layperson. This measure was created to stem a practice by contractors issuing and requesting fraudulent certificates that implied policyholders would receive broader coverage than was actually written into their contracts. This new bill criminalizes both the request for and the writing of those misleading certificates.

“Reputable contractors were in a bind, because disreputable contractors were providing these certificates, putting them at a competitive disadvantage,” said Assemblyman Kevin Cahill, chair of the Insurance Committee.

Cahill feels confident the governor will not veto the bill. “We vetted it with the state Insurance Department and the state Finance Department, and it didn’t conflict with what they had in mind. We got informal assurances that it met their standards.”

In addition to the greater regulation of certificates, both the Assembly and the Senate have signed off on a deregulation measure allowing life insurance companies to increase the percentage of assets they can invest in foreign companies from 16 to 20 percent.

“Diversification of assets is always a good thing,” said Alison Cooper, director of the Senate Insurance Committee, which is chaired by state Sen. James Seward. “You want to keep rates low, and you don’t want to put all your eggs in one basket. We’re in a global economy now, and it’s important to diversify. This will benefit the policyholders.”

Of course, too much diversification overseas can become problematic. In June the Bank of Tokyo Mitsubishi-UFJ was assessed $250 million in penalties by DFS for violating New York banking law. The fine was the result of the bank processing over $100 billion in transactions through New York’s banking system on behalf of regimes and privately owned entities from Iran, Sudan and Myanmar/Burma. Standard Chartered Bank was penalized $340 million by DFS for similar offenses. Moving forward, DFS is aiming to enhance New York’s ability to detect, prevent and penalize offshore money-laundering operations for enemy states.

Both Cahill and Seward’s offices are quick to point to legislation their houses successfully passed—even those bills that died or stalled in the other house—making the case thtat they are starting points for the coming session.

Seward has his sights set on a comprehensive reform of no-fault fraud, a legal loophole that organized crime rings have exploited to stage fake life-threatening car accidents to collect insurance money from automobile insurance companies. The Senate passed bills to allow for the retroactive cancellation of fraudulent credit cards used to take out insurance; make the staging of an accident a crime; and to criminalize the runner (the driver in an accident), but none of these bills made it through the Assembly—in part, Cahill asserts, because of the piecemeal approach to the legislation.

No-fault fraud schemes “were created all at once … and now it’s time to look at in a massive way,” Cahill said. “We’re looking forward to going forward with the method we used with Sandy to come up with our package of bills. We believe we have to do this comprehensively.”

The approach to Superstorm Sandy was a series of hearings and roundtable discussions to address problems and find best practices for the state moving forward. In this case, according to Cahill, that would entail codifying DFS’ executive orders around insurance companies using expedience to settle claims following a natural disaster. “We believe it’ll move in the Senate,” Cahill said.

One of DFS’ chief goals this year is to erect guardrails for irresponsible big-market practices that could negatively impact New Yorkers. One such practice is the purchase of annuity companies by private equity firms.

An annuity is a long-term slow-growth investment to help supplement retirement.

“Generally, private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments. If just a few of these investments work out, then the firm can be very successful—and the failed ventures are just viewed as a cost of doing business,” Benjamin Lawsky, superintendent of DFS, remarked in a speech in April at an economics conference in New York City.

“This type of business model isn’t necessarily a natural fit for the insurance business, where a failure can put policyholders at significant risk .… We need to ask ourselves whether we need to modernize our regulations to deal with this emerging trend to protect retirees and to protect the financial system.”

DFS’ interest in regulating the takeover of annuity companies by private equity firms—as well as instituting some other regulatory measures in areas like virtual currency and payday lenders—have led some people in the world of finance to worry that an overly regulated market will push New York’s insurance industry to states with friendlier laws in place.

However, if measures like those taken in regard to certificates of insurance and the proposed no-fault legislation can reduce corruption, they may ultimately save money for law-abiding New Yorkers and insurance companies alike.
Insight: Insurance and Finance

New York Insurance Association
By Ellen Melchionni

We applaud the governor and Legislature for their work to reduce state spending with the last three budgets keeping spending increases below 2 percent. However, one budget practice that involves inappropriate spending has not been addressed. Funds earmarked to regulate the insurance industry have been hijacked for more than 20 years and transferred to other state agencies to fund non-insurance programs.

The 2013–14 budget assesses the insurance industry $413 million, of which a mere 28 percent is being properly used to pay for the expenses of the Department of Financial Services as mandated by law. The remaining 72 percent, or $301 million, is being unlawfully used to fund other state agencies for programs with no connection to insurance regulation. Since 2008 the assessments have nearly doubled and the suballocations have nearly tripled. This massive improper assessment is a financial burden on all domestic New York insurance companies. Companies could use this money to employ more New Yorkers and further invest in the state’s economy.

In just the past six years alone the illegal suballocations have provided the state government a hidden windfall of more than $1.8 billion. In essence, the New York State government is using the assessment as a slush fund with no monetary limit for programs that may be worthwhile but are not relevant to insurance. Besides being grossly unfair, it is consumers who ultimately pay the price for this shameful budgetary sleight of hand.

We call on the governor and Legislature to finish the task of making New York a more attractive place to do business by eliminating this practice. It would be a huge step toward truly being able to say that New York is “open for business.”
New York Bankers Association
By Michael P. Smith
President and CEO

The early months of 2013 were characterized by the banking industry’s work to help rebuild small businesses and homes in the wake of Superstorm Sandy. In the immediate aftermath of Sandy, the banking industry responded quickly to the urgent needs of the communities it serves. Within days, we saw banks large and small together donating tens of millions of dollars to various community organizations. This is in addition to the $30 million fund banks from all over the state of New York created with the New York Business Development Corporation to deploy critically needed small business loans well before FEMA aid could be made available. To further assist customers affected by the storm, banks granted forbearance on loan payments and waived loan fees, credit card late fees and overdraft fees. However, much work remains, and the New York Bankers Association’s legislative and regulatory initiatives for 2014 will continue to include Sandy-related items, such as mitigating the impact of escalating flood insurance premiums.

In 2013, NYBA achieved several important gains for enhancing New York’s trust and estates industry. The Legislature passed and the governor signed an important measure streamlining ATM fee disclosure requirements.

Next year, NYBA will also work for: (1) authority for thrift institutions to accept municipal deposits; (2) expedited foreclosure of abandoned property; (3) nonjudicial, uncontested foreclosure of commercial properties; (4) tax reform that addresses the diversity of New York’s banking industry; (5) continued modernization of trust and estate laws; and (6) stronger incentives for reporting suspected cases of financial abuse of the elderly.

The New York Bankers Association represents 150 community, regional, and money center banks operating in the state of New York with more than 200,000 employees. The industry is dedicated to working in partnership with government to achieve a healthy New York State economy, which benefits all New Yorkers. If these goals can be accomplished, New York’s banking industry will be a driving force for a stronger and more stable New York economy.

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