For Empire State, there’s no escaping national issues

Few state insurance commissioners have spoken out on national issues as frequently as New York Superintendent of Insurance Howard Mills. In this interview with Insurance Journal’s Andrew Simpson conducted at the recent meeting of the National Association of Insurance Commissioners, Mills expands on his ideas for national disaster planning and reinsurance collateralization, as well as on his own state’s efforts concerning coastal property insurance, auto insurance fraud and workers’ compensation.

An NAIC subcommittee has moved ahead on the issue of whether to change current reinsurance collateralization rules. Where does that stand?
Mills: Sure, Andy. What happened this week at the NAIC was that the committee looked at a white paper that had been drafted last year. The New York Department along with the District of Columbia Department drafted a white paper with the Collateralization Task Force that basically was a road map that if the NAIC should decide to change its rule on collateralization and if we needed to come up with an alternative, what approach would we take. This white paper outlined a number of different proposals: a cooling proposal, a rating proposal.

The committee, this week, voted that should we go down that road that we would look at the rating proposal as a viable alternative. The rating proposal is geographically agnostic, meaning that it really doesn’t concern itself with the country of domicile; it really focuses on the solvency of the companies in question. So, that has been done, there still is a charge out there from the Executive Committee that the collateralization working group should come back to the full membership of the NAIC at the December meeting us some concrete plans for going forward. Should we change collateralization? Should we not? Now again, there has been this signal sent that if there is a decision to change, the rating proposal is the preferred proposal.

I would imagine this is going to stir up a little bit of controversy within the insurance industry.
Mills: It’s a very contentious issue, as you know, and there are very good arguments on all sides. There are those who feel that this is not the time to change the collateralization rule. The primary concern, of course, is that some of these entities, these non-U.S. companies, are in different regulatory climates and this is not a time or a era, given all the problems we’ve seen, when we should be moving away from less regulation. Another argument, on the U.S. side, of course, is this is a truly global issue. It’s a global market. Foreign insurers have a significant portion of the US market. They pay a significant amount of reinsurance in the United States every year and they are some who feel that this may increase capacity.

My bottom line — and I brought this up at our meeting and I’ve asked the task force that is in charge of working on this question to answer this question — … I asked them the other day at the hearing to focus on the issue of what will be the bottom line impact for the consumers. In other words, if the collateralization rule is dropped, will there be a cost savings passed on to the consumers of reinsurance, and ultimately the primary insurance consumers?

Is that proposal one where eventually the funds set aside would be related to the credit rating of the company?
Mills: Yes. They’d be rated by credit. There would be an independent entity set up that would attach credit ratings and the collateralization requirements, if any. Some companies with triple A ratings might not have to post any collateral at all… but there would be subsequent levels of collateralization required based on their rating.

It seems like there’s still some work to do on that.
Mills: There is a lot of work to be done, but the discussion has definitely ticked up a notch, if you will.

You have been a leader on the issue of a catastrophe fund, or trying to come up with some solutions on that. Last I heard you speak, I think you suggested that it’s not necessarily a federal government issue. What is the solution?
Mills: There definitely has to be some federal involvement but that does not mean that there has to be a federal layer, as I very much do believe we need when you’re talking about terrorism cover. With regard to natural catastrophes, we have seen several things, a number of observations. We really don’t have a national plan to deal with this other than incurring federal debt, where massive bailouts occur and that does a number things that are not desirable. It really encourages people to have this irresponsible attitude towards their own insurance needs. If they come to expect that there will be a federal bailout, they are less likely to be responsible consumers of insurance.

But, we definitely do need a federal role in helping to facilitate and create that primary layer, the insurance industry’s layer being able to carry more of the burden so the taxpayers don’t have to. Ideas like dedicated cat reserving — changing the tax code to allow that — that requires federal action. That requires study, so what we’ve done here at this NAIC meeting is to adopt a resolution calling upon the Congress to create a commission to study the issue and to come up with resolutions and ideas for dealing with natural catastrophes. Going forward, we know we are well into an era of increased severity and frequency of storms. We have increased densities in values, so we are seeing very significant loss events.

We are in the midst of a hurricane season. What is your department or the state doing to help in preparedness for this season?

Mills: I’ve been working very hard, along with our department, to try to do a number of things back in New York, number one: increase consumer awareness. Unfortunately, many New Yorkers are of the false opinion that we don’t live in a hurricane prone state. We don’t have the frequency of Florida, but when we have them they tend to be really destructive storms. It’s not a question of, it’s a question of when we will have a very significant hurricane make landfall in New York State, Long Island, God forbid, the New York City area — it will happen at some point. I’ve been encouraging consumers to be more aware of their policy language, understand wind storm deductibles, the fact that they will be on the hook for a significant out of pocket expense should they have a loss. Most importantly, that they will not, with their normal homeowners insurance, have any coverage for flood, and floods is a major issue with hurricanes especially — the coastal exposure on Long Island and New York City. We will have a hurricane some day that will have very significant flooding, and the take up on flood insurance is not nearly high enough, so people need to look out for their flood needs.

Also, they can do a lot with mitigation to control the amount of risk and reduce the loss. It’s relatively inexpensive, when you consider the loss possibilities, and easy things to do like hurricane roof clips, hurricane storm shutters, hurricane garage doors can make the difference between some exterior damage to your home and a complete and total loss. People need to have greater responsibility for their own loss mitigation.

Given the pullback of Allstate from some markets in New York and other insurers looking at their rising reinsurance costs, how is the New York property insurance market dealing? How is it looking these days?
Mills: We had a hearing a couple of months ago looking at the availability and the affordability in light of the Allstate decision and some other concerns we’d heard and what we have found is that other writers, other insurers, have taken the opportunity to get into the market. A very significant player is withdrawing, to some degree, and that has created opportunities for them. We still see that the market is strong and competitive and that there is availability.

On the issue of auto insurance fraud, you’ve said that the state has done a lot in terms of regulation, but maybe it needs some more tools. What would those tools be?
Mills: We definitely do. We have done, at the New York department, everything that we can from a regulatory point of view. We have issued regs that change the amount of time that people have to file claims, that dramatically reduce the opportunities for fraud and we saw the loss ratios come down significantly. We are still seeing, on auto in New York, the loss ratios coming down, indicating that there is yet more room for rate reduction. We are currently sending out letters to insurers asking for their loss data and working with them on their rates.

Going forward however, we really do need the state Legislature to act and to enact tough legislation that makes the crime of insurance fraud, especially with regard to auto in New York, a real crime. When I say a real crime, of course we have penalties on the books right now, but they amount to a slap on the wrist. We need the runners’ bill, the staged accidents bill with serious felony prison conviction time attached because only when we have true deterrent statutes on the books, can we really try to cut down significantly on the very significant numbers of bad actors out there perpetrating insurance fraud.

Another priority for the Pataki Administration has been workers’ compensation reform. Where does that stand and how important those reforms?
Mills: You’re right. In 1995 Governor Pataki came in and enacted significant workers’ comp reform. It was a major issue in New York for decades. The workers’ comp reforms that the Governor spearheaded in ’95 lead to significant savings and were a great help to the business community in New York State. Now, 10 years have passed and it’s time for workers’ comp reform again. The Governor has submitted his proposal to the Legislature; the Legislature has yet to act. I urge them to do so because we are in need of structural reform on workers’ comp to, again, put in place some savings to allow businesses to grow in New York State. We are currently looking at some rate issues. That will be coming up in the near future, so I can’t really elaborate on what it might be, but we really do need the legislature to act on Governor Pataki’s proposals for workers’ comp reform, and I am urging that they do so.

Do you have any hopes that it will happen?
Mills: The legislative session is winding down in New York as you and I conduct this interview, we have only got a couple weeks to go. So, I’m an optimistic and hope springs eternal. There often is in Albany, as you know, a significant movement happens at the end of sessions, so I’m optimistic. The Governor has made this a top priority, and it should be. The business community, the insurance consumers and the people who need workers’ comp desperately need the legislature to act on the Governor’s proposal.

The brokerage compensation and disclosure issue that began in your state, is that pretty much winding down? Are those investigations pretty much done with?
Mills: They pretty much have, and we continue to work at the department with the insurance industry on disclosure and transparency issues to address the question.

(Editor’s Note: Since this interview, the Legislature adjourned without passing workers’ compensation reforms. Also, since this interview, Mills has rejected an industry request for a hike in workers’ compensation rates)