New York State
Eric R. Dinallo Superintendent of Insurance 25 Beaver Street New York, N.Y. 10004
|ISSUED 11/05/2007||FOR IMMEDIATE RELEASE|
New York Insurance Department Issues First Principles-Based Regulation Proposing Principles for Both Regulated and Regulators
Insurance Superintendent Eric Dinallo today released a draft regulation that would make the New York Insurance Department the first in the nation to establish principles-based regulation. The draft includes 10 principles for industry and is accompanied by 10 principles for regulators. The draft regulation will be distributed for discussion by the industry and consumers and will be on the agenda of the New York State Commission to Modernize the Regulation of Financial Services, which Dinallo chairs.
Principles-based regulation aims to reduce unnecessary regulatory and administrative burdens, ensure that regulation and its enforcement are proportionate, accountable, consistent, transparent and targeted, and provide benefits for consumers from more efficient markets, more effective protection, and better responsiveness to consumers' needs.
“New York must have the best, most effective regulation of financial services in order to remain the financial capital of the world,” Dinallo said. “Today that means principles-based regulation. The financial services marketplace is extremely creative and innovative and our regulation must be just as nimble. Thus, the best way to protect consumers and promote fair and honest competition is with principles-based regulation.”
“The essential goal of regulation is not rote compliance with a long list of rules, but ensuring appropriate outcomes. These principles focus both the regulator and the regulated on such outcomes and tell regulated companies our expectations for how they will conduct their business. It brings the issue of compliance to the highest levels of a company – to the Board of Directors and the management committee. It provides the flexibility to fit the different business models of thousands of different companies, while improving consumer protection,” Dinallo said.“As a code of conduct, the principles are reasonable rules that can be easily incorporated into the business philosophy and operations of regulated parties with little or no expense. In fact, most regulated entities should already be operating in accordance with such principles,” Dinallo said. “Importantly, the principles will not expose companies to additional private lawsuits because New York’s Insurance Law generally does not provide for private rights of action. Only the regulator can enforce the principles. This is, in fact, a significant competitive advantage for New York.”
“The principles ask companies to be ethical to their core, rather than focusing on technical requirements. Indeed, if a company is generally conforming to the principles, but violates a rule in a way that does not harm the public, we should take that into account,” Dinallo said. “It is clear that detailed rules alone have not prevented misconduct. In fact, principles eliminate loopholes and gaps between rules that could allow activities that harm consumers or mislead regulators.”
“The Commission will discuss the principles at the upcoming January meeting. This is an opportunity for the Commission to focus on a key competitiveness issue – the ability of our regulatory system to keep up with ever-evolving and innovative markets,” said Scott Rothstein, Executive Director of the Commission. “The principles do not pre-empt existing law or regulation. But they make clear the fundamental purposes behind those laws and regulations and can serve as scaffolding around the existing regulatory structure, providing support and guidance as products, practices and markets evolve.”
“Principles-based regulation gives the regulator the right tools to begin changing its relationship with the regulated. An essential part of a principles-based approach is an open door between the regulator and companies so the companies can seek and receive guidance. We expect to turn regulation from periodic ‘gotcha’ exams into a continuing dialogue. Companies that deal honestly with the Department can expect to be treated honestly in return. But we will, if anything, be more stern with serious violations,” Dinallo said.
The proposed new regulation continues and codifies the Insurance Department’s move towards principles and risk-based regulation under Superintendent Dinallo, who took office this year. This approach has already been applied in the settlement of the World Trade Center insurance claims and in the implementation of the workers’ compensation reforms, where the Department has introduced free-market principles. This is the third significant draft regulation circulated by the Department for public comment in the last month that reflects the new principles-based approach. The first requires property insurers to create a reserve for catastrophes such as hurricanes. The second treats top-rated non-U.S. reinsurers the same as U.S. companies on the issue of posting collateral.
The Department has also developed a proposed list of principles for regulators, which it intends to issue as a Circular Letter. The principles for the regulators will establish a baseline for interactions between the Department and regulated entities, and are intended to focus regulatory action on key areas of risk, while fostering competition and innovation.
Implementing a principles-based approach will require continuation and acceleration of the changes already begun in the Insurance Department’s movement towards a risk-focused approach to regulation of financial solvency. Under the principles-based approach, the staff’s new role in assessing adherence to outcomes and recognizing prospective risk in insurance companies will require robust professional judgment, reinforcement from management and continual training. The list of principles for regulators will assist in this migration as it provides the foundation for the professional judgment exercised by staff.
In developing the principles, the Insurance Department has already reached out to several insurers, insurance trade groups and other interested parties. The Insurance Department will continue to conduct outreach by circulating a working draft of the proposed 10 principles-based regulations to the insurance industry and consumers. It will then go through the formal proposal process, which includes publication in the New York State Register and a formal 45-day comment period for written comments.
10 Principles for the Insurance Industry
(1) A licensee shall lawfully conduct its business with integrity, due skill, and diligence.
(2) A licensee shall take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems.
(3) A licensee shall maintain adequate financial resources.
(4) A licensee shall observe proper standards of market conduct.
(5) A licensee shall pay due regard to the interests of its clients and treat them fairly.
(6) A licensee shall pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.
(7) A licensee shall manage conflicts of interest fairly, both between the licensee and its clients and between clients.
(8) A licensee shall take reasonable care to ensure the appropriateness or suitability of its advice and discretionary decisions for any person or other entity that is entitled to rely upon such.
(9) A licensee shall ensure that the assets of any client for which the licensee is responsible are adequately protected.
(10) A licensee shall interact with the superintendent and other regulators in an open and cooperative way, and shall disclose to the superintendent any information relating to the licensee of which the superintendent would reasonably expect notice.
10 Principles for Regulators
(1) Regulators, and the regulatory system as a whole, should assess risk comprehensively and concentrate resources on the most important areas.
(2) Regulators should be accountable for the efficiency and effectiveness of their activities, while remaining independent and objective in the decisions they make.
(3) Guidance from the regulator should be readily available and easily understood.
(4) Interested parties should be consulted as appropriate prior to issuance of written guidance by the regulator.
(5) When developing new regulations, the regulator should consider how they can be implemented and enforced using existing systems and data to minimize the administrative burden on regulated entities.
(6) No investigation or inquiry should take place without an appropriate basis.
(7) The regulator should not require a regulated entity to provide unnecessary or needlessly duplicative information.
(8) All regulatory action should be proportionate to the issue being addressed.
(9) Regulators should allow and encourage competition and innovation, while ensuring against insolvency and protecting consumers and markets, and only intervene as necessary to protect consumers and markets.
(10) Regulators should respect the responsibility of a firm’s senior management for its activities and for ensuring that its business complies with requirements and hold senior management responsible for risk management and controls.
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