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New York State Insurance Department Statement Before Assembly Speaker Sheldon Silver & Assembly Standing Committee on Insurance

Oral Statement given by Superintendent Gregory V. Serio

Tuesday, October 15, 2002

Thank you, Mr. Speaker.

Mr. Speaker, Mr. Chairman and members of the panel, my name is Gregory Serio, Superintendent of Insurance. I am joined today in the audience by First Deputy Superintendent Louis Pietroluongo, Senior Deputy Superintendent Peter Molinaro, General Counsel Audrey Samers, Property Bureau Chief Mark Presser, Consumer Services and Licensing Bureau Chief Salvatore Castiglione, Legislative Counsel Michael Tobin and several others from the Department, all of whom have had significant responsibilities in responding to the World Trade Center disaster and its considerable aftermath.

Indeed, a day does not go by where I or someone in the Department is not spending a larger amount of time dealing with the current insurance market challenges brought on, in large part, by the devastation just a few blocks south of here. Individually, and as teams, from the top of our organization to the bottom, from our main office in New York City to Albany, Rochester and Buffalo, everyone in the Department has been impacted by, and is impacting our response to the many issues, problems, consumer complaints, company investigations, public policy questions and, to be sure, the very personal manifestations of the single largest and most dramatic loss of life and property in our Nation, State and City’s collective histories. Even now, thirteen months later, we are tackling matters that, in some respects, are more difficult to deal with than the initial torrents of requests for assistance, information, support and answers. The claims cases are harder because they defy timely and clean closure, the public policy questions are harder because they have not been settled, and the requests for support are harder because, as we now know, the passage of a year has done little to heal the raw and tattered emotions wrought by this unprecedented atrocity.

Even with these challenges, the Department has not withered; indeed, it continues to stand tall in the face of an ever-increasing job load. Monitoring and refereeing claims settlement activities, very much the nature of our work in the first few months of this crisis, has been continued and now joined by the very difficult issue of assuring continued coverage availability and affordability in an extremely constricted insurance market. Outreach activities continue at a brisk pace and across the spectrum of businesses, community and residential groups, insurance trade organizations, including reinsurers, and governmental agencies. Outreach has included public meetings, individual business visits, presentations to interested groups, and on-line outreach, satisfaction surveys and complaint reporting. Meetings with the Real Estate Board of New York, United Jewish Appeal/Federation of Jewish Philathropies (who, I might add, had been instrumental in focusing the Department’s early attention on the now well-known problem of insurance coverage renewals) and a consortium of Jewish community groups, Moody’s Investor Service, Downtown Alliance, Lower Manhattan Development Corporation, Healthcare Association of New York State, Tribeca Film Festival, New York Mercantile Exchange, New York Public Interest Research Group, Southwest and Steamer’s Landing restaurants along with many other businesses, World Trade Center Tenants Association, City Comptroller William Thompson’s office, Councilman Alan Gerson’s staff, Attorney General Eliot Spitzer, and numerous other constituent groups or other public officials have been held consistently over the past thirteen months, and more regularly since January.

Outreach activities have been conducted not just for the purpose of assessing market impacts and manifestations of the disaster, but to also evaluate its implications on pre-existing insurance market problems. Also, along the way we have sought to energize the discussion of alternatives to address the dysfunction and dislocation that came as part of the tragedy’s natural fallout. The public forums sponsored by the Department on Long Island, Manhattan, Albany and Rochester revealed not just the depth and scope of the problem on a statewide basis, but also its exacerbating impact on problems such as on contractor liability coverage. 9-11 has had a distinct and negative impact on property and liability coverages for large concentrations of risk regardless of their geographic location within the state. I am pleased to report that among the solutions to the current market problems that have come from some of the straight talk during these forums and other public discussions, including those with chamber of commerce groups around the state, is the decision of the New York State Builders Association to move forward with an application to create a reciprocal in New York. I will address that in greater detail later.

Outreach activities, and information garnered from an open line of communications between the Department, insurance agents and companies and various constituency groups, have yielded numerous reports of carrier market conduct activity that may or may not be violative of the insurance law, including pricing changes, coverage availability restrictions and departures from the market. The media, too, has been very helpful at bringing problem situations to the Department’s attention and then partnering with us to bring the appropriate pressure to bear to assure timely resolution of those same problem situations. In some respects, the broad-based and unprecedented outreach initiatives undertaken by the Department, and the generally positive response received from those with whom we have interacted, has given the Department a new and welcome exposure that I certainly hope will be replicated on more regular matters. Likewise, the activities undertaken since those first hours of the workday on the 11th, when the 700 employees of the Department shared the streets and sidewalks of lower Manhattan with thousands of others, have given the Department a true sense of community and collegiality with the businesses and residents of this area. In every sense of the term, the last thirteen months has been a matter of "neighbor helping neighbor."

A significant part of the Department’s outreach efforts has been focused on the passage of a federal terrorism reinsurance backstop bill by Congress. In some respect, every plan of action, every analysis of options available to solve the current market crisis, every prognostication of how long the crisis will last emanates and is necessarily dependent upon the outcome of the Congressional debate on a terrorism bill. Thus, our outreach activity has not just been with members of Congress, members of New York’s Congressional delegation, including our two United States Senators, White House, Treasury Department and Federal Reserve staff, other insurance regulators or state legislators; we have taken the public discussion to and partnered with New York’s business community—hospitals, real property owners, insurers, money managers, and more—to make certain that New York spoke to the players in Washington with one voice…one authoritative, intelligent and unrelenting voice calling for action on this important legislation. It has been the position of the Department from the very early days of this crisis and our unwavering opinion since that a federal bill is critical to providing the global relief from the pressures that the seemingly new-found risk of terrorism has placed on the aggregate global capacity of the insurance market. Decisive action by Congress coupled with actions already and still to be taken by us here in New York can solve this problem that faces business and government alike. A necessary condition precedent of Congressional action is not optional, however, it is mandatory to the formula for success.

Indeed, the promises of imminent Congressional action in December 2001, February, April, June, August and now in October on a terrorism bill has kept the New York and national marketplace in an unfortunate state of suspended animation. Discussions on home-grown remedies to the problems at hand have been stymied by the sheer uncertainty of what, if anything, will come from Washington, when it will come, whom it will cover and whether it would be enough to counter the multi-faceted crisis that we face. To be sure, some steps proposed by the Department to help relieve pressure in this market in the short term have been held off from implementation upon the request of insurers, insureds or both, and largely for the same reasons: 1. Dramatic action in and by New York may not be necessary if the federal action discussed and anticipated was sweeping enough to provide the requisite levels of pressure relief from the capacity crunch; and 2. Some action by New York or other states may serve to undermine the intense lobbying efforts on Capitol Hill by giving Congress the mistaken impression that the crisis was averted and no federal intervention was necessary at this time. In an atmosphere where some in Washington—including self-proclaimed consumer advocacy groups--are still questioning the very existence of a crisis, these dynamics have been very disconcerting to regulators, businesses and the insurance marketplace.

The Department’s announcement to form a Blue Ribbon Panel and conduct public forums throughout the state was made at this House’s December hearings with the expectation that federal action was forthcoming. Congress, exercising uncharacteristic speed in moving on the special victims fund and aviation security legislation, was certainly poised to also act with the same deliberate sense of purpose on the terrorism backstop legislation, or so we thought. As the delays in Washington started to move from year-end 2001 and into the legislative session of 2002, the Department made a decision to move forward on the public forums. Indeed, the transcripts of these sessions, which we provide with our prepared testimony today, have also been furnished to the House Financial Services Committee and Congresswoman Sue Kelly, chair of the Committee’s Oversight Subcommittee, New York Congressional delegation member, and one of the champions of the effort to enact meaningful terrorism reinsurance legislation in Washington. With respect to the Blue Ribbon Panel, however, it was not practical to assemble the Panel and ask business leaders, insurers and consumer representatives to discuss the possible long term solutions to the current crisis in a contextual vacuum created by the regular promises of meaningful action and seemingly chronic inaction by Congress. Federal action is not only critical but it is central to any discussion on what ails and what will cure the market. The Panel remains viable as a tool to us as regulators and you as policymakers, and will be implemented immediately either upon Congress’ passage of a terrorism bill or upon Congress’ recess next week without passage of a bill. It will also be asked to report to the Department no later than January 15th, so that its deliberations can be used to formulate New York’s long-term strategy and that necessary legislation proposerd by the Panel as part of the plan of implemetation of the strategy can be put before the Legislature for action early in 2003.

We do not need a special commission to tell us, though, that New York’s market can be greatly aided—in these turbulent times and in more moderate times—by the passage of several initiatives that are already before the Legislature. Affordability and availability of sound coverages over the long term should be the hallmark of any insurance market, and critical to that objective is the complementary co-existence of a stable traditional insurance marketplace and options for formalized self insurance, namely reciprocal, captives, self-insurance trusts and other methods of alternative risk transfer and financing. The Legislature should take swift action upon its return on the Department’s bill to expand captive insurance opportunities to small businesses. The insurance trade and general business press are consistently running articles, features and opinion pieces on how captives have provided that sanctuary of relief for many business enterprises over the last twelve months. The Metropolitan Transportation Authority’s successful venture into captives has not just saved it millions of dollars in insurance and claims costs, but has also served as a stabilizing factor in the MTA maintaining adequate coverage limits—the issue truly of greatest concern to businesses and regulators alike—through the recent market disruptions. Indeed, it has been the success of the First Transportation Mutual Assurance Company—the MTA’s captive insurer—that has led us to promote captive development as the solution for other state and local government and authorities’ coverage availability difficulties. There is also no reason why New York’s small businesses should not be afforded the same opportunities as larger firms in managing risk.

The Department has also been strongly promoting the exploration of reciprocal insurance opportunities for business groups as an alternative to the current coverage constraints. Article 61 of the Insurance Law already provides for reciprocal insurer formation, and these carriers have been largely responsible for the sustained coverage stability in the medical malpractice insurance market over a generation. The New York State Builders Association, stinging from the loss of available insurance in any market at any price for scaffolding risks—an issue that came out in several of the public forums and a problem exacerbated by the mutiple factors that have led to the current market difficulties—has announced and the Department is cooperating with its submission of a reciprocal insurance company application.

The Department has also promoted making the New York Property Insurance Underwriting Association permanent, so that it may develop the financial resources necessary to make it a viable alternative to the traditional market when coverages become difficult to find. As it did so admirably during the coastal insurance crisis, the Fair Plan can serve a role to smooth out temporary market disruptions if it has the financial capabilities to do so, and we should make every effort to provide the Fair Plan with the tools to do so.

Many businesses in lower Manhattan have complained about the limited nature of coverages such as business interruption and civil authority insurance, particularly in the context of a prolonged event such as the World Trade Center disaster. There is a critical need to update and modernize insurance coverages provided in typical property/casualty forms, and there is a need for legislation to greatly expand the range of coverages available to businesses in New York. The Department’s civil authority legislation is one way to accomplish this objective. As one business owner told me, if the expanded coverages such as civil authority insurance were available, he would have bought them in lieu of lower premiums during the competitive years when rates were very attractive. "Live and learn" should not be the mantra; making these coverages available and known to the insured should be.

While these alternatives are necessary to make the New York Insurance market great again, we do not promote them as a substitute for the admitted and nonadmitted markets, but as complements thereto. There is still a fundamental need for a strong and stable traditional insurance marketplace for all those who cannot or choose not to become reciprocal members, or who cannot or choose not to form or participate in a captive, group captive or other form of self insurance. For all of those businesses, we have been energetic in preserving the integrity of the traditional insurance market. The Department has not allowed terrorism exclusions, finding them—at least in the forms that have been proposed—to be little more than an effort to pass the risk of terrorism entirely on to insureds. The Department has not approved average rate increases beyond the low 20% margin, keeping in line with the average rate of increases prior to September 11th; the vast majority of approved rate changes have been averaging between 0% and 10% over the past twelve months. The more dramatic rate, or, more appropriately, premium changes that many businesses have experienced have come from changing over from one carrier to another, changing underwriting to include revisions to "insuring to value" assessments and confirming such values with on-site inspections and other methods, changing credit and dividend programs to also reflect tighter underwriting, changing over from an admitted carrier to a non-admitted carrier, or trying to maintain a similarity in coverage limits from previous years. The Department has reviewed by market conduct examination the cancellation and non-renewal practices of numerous companies; in the course of these exams, we found that several insurers have inappropriately applied debits on risks that just a year earlier were given underwriting credits. These types of credits, and the removal of same, need to be justified before a company can act on them. These matters will be subject to enforcement action.

And, it cannot be forgotten, some rate increases are reflecting, some for the first time in several years, actual losses incurred.

Also, the Department has not proposed and will not propose any changes to the standard fire policy, the first line of defense against terrorism in the current property insurance form. The Department has proposed allowing the use of actual cash value (ACV) consistent with the terms of the statutory standard fire policy instead of replacement cost value as a form of sublimit for terrorism and terrorism-related fire risks in the event that Congress does not act on a federal terrorism backstop. While far from perfect, since it shifts some risk back to the business insured, the conversion to ACV will provide some degree of pressure relief from the capacity crunch.

The traditional market, of course, must adhere to the laws of New York in good times and bad times, and the Department has been vigilant in its review and enforcement of market conduct laws. Numerous insurer and insured surveys have been conducted to keep the Department abreast of market conditions and to help us anticipate future market dynamics. The Department is also in the process of conducting numerous market conduct examinations into redlining and market withdrawals. While evidence of redlining has been found with some companies—and those investigations are continuing—the nature of the market conduct transgressions, like the terrorism insurance problem itself, is more piecemeal and, perhaps, insidious, occurring one risk at a time, one area at a time, one rate change at a time. There have not been wholesale departures from the market, though underwriting restrictions and pricing have given another impression. The Department has been balancing what has been perceived with what has actually occurred by keeping in constant contact with insurers, insureds, and agent groups.

My assessment is that the truly difficult times will come when the traditional market players see no measure of relief on a global basis coming from Washington. I have stated publicly before that the hard markets will be with us through the 2004 renewal cycle, at the least, regardless of federal action; the inability of Congress to send a bill to the President will make matters only worse, much worse. Considering the multi-faceted nature of the problem—dramatic drops in investment income due to interest rate suppression and floundering equity and bond market returns, the enormity of the losses from September 11th and the unknown risk of global terrorism—there is little in the way of relief from current market constraints for the traditional carrier. A federal bill that creates a clear demarcation of what is the responsibility of business owners and their insurers and what is more appropriately the province of our federal government in terms of economic stability and national security will help bring relief to a traditional insurance and reinsurance marketplace that has had, in the alternative, to commit vast amount of capacity to the unknown quantity of terrorism exposure.

The current difficulties in the market, though, must be evaluated against the backdrop of the generally responsible claims-paying activity of the insurance industry since September 11th. With some notable exceptions that the Department has addressed with aggrieved businesses, the insurance community has striven to assure the timely payment of claims. More than 33,000 claims have been reported or paid with more than $18 billion in claims dollars back in insureds’ hands by the 119 insurers that the department has been tracking through our Disaster Coalition and Insurance Emergency Operations Center. The bulk of those claims are for commercial property and business interruption losses. Those that have not been settled or paid include primarily those for continued business interruption, such as those with marginal or no physical damage to the premises but otherwise disrupted by the incident.

The Department thanks you Mr. Speaker for your continued interest in the work of the Department in the aftermath of the World Trade Center disaster. We have worked very hard to serve our neighbors—our shared constituency—through the actions noted here and in our prepared statement. I will be happy to answer any questions you may have. Thank you.

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