Departmental Consolidation: Seward Sees Folly in Fast Tracking Cuomo Plan
Senator James Seward (R-Oneonta) and Chairman of the Senate Majority Insurance Committee said “we are going to proceed very cautiously on that. We are willing to sit and talk about it and see if something can be worked out, but I want to proceed cautiously for a number of reasons.” “In my mind,” continued Senator Seward, the business of insurance and banking, while on certain limited products there may be some overlap, but they are two distinct types of businesses for starters. If those Departments were ever to be merged, I would want to maintain some separateness there in terms of regulation.”
“Would it make the regulation of insurance more cumbersome or would it streamline regulation? Would it make doing business in New York State more difficult or easier? If the answer is it’s going to make regulation more cumbersome or more difficult to do business, I see no reason why we should proceed,” continued Seward.
“We are willing to talk about it and see if something can be worked out, but I ‘m not signing on right at the get go. There are some specific problems with the bill. For example, it would greatly expand the prosecutorial powers of the Superintendent. Currently, when you need to prosecute, if there is a referral over to the Attorney General, my understanding is that both the Attorney General and the Superintendent of the Insurance Department would have the same prosecutorial powers.”
In addition to the Insurance and Banking Department mergers, the Consumer Protection Board would become a new Department of Financial Regulation. But according to the present draft of the legislation, the new Consumer Protection Board would have the power to investigate banks, hedge funds and other high-profile securities and force testimony, penalties and financial fraud.
Senator Seward said there are also penalties that are greatly increased under the proposal. “There’s restitution imposed on insurers. So we have some tougher language there. There’s also language that would allow civil penalties and restitution to be imposed upon insurers.” Ellen Melchionni, President of the New York Insurance Association, Inc. told the INSURANCE ADVOCATE, “we understand conceptually what the Governor is trying to accomplish by the consolidation. He is seeking cost efficiencies and cost savings through coordinated administrative, clerical and human resource functions.”
“However,” continued Mechionni, “currently the way the budget is structured and the way the agency is funded, the monies that they collect, 65% of what they are collecting at this new agency will be sub-allocated out to other agencies.”
Melchionni of the NYIA said while the budget has nearly doubled in the last couple of years, sub-allocations have nearly tripled. “As examples in 2008 it was the HMO program so 70% was paid out in sub-allocations, then it was Healthy New York. There was the HMO Direct Pay that cost $40 million and the Healthy New York program was over $160 million. So they just dumped, basically $200 million onto the backs of the insurance industry.” “There is vague language in the Governor’s proposal that would give the Superintendent latitude as far as these assessments of sub-allocations,” explained Senator Seward. “Plus, the Division of the Budget tells us that it will cost an additional $6.4 million more than currently and who will pay that will be the insurers and the banks.” New York’s Banking and Insurance Departments are funded by New York business and there are basically no savings, no cuts. It is just the cost of operating the departments.
“Obviously the Insurance Department is a watchdog for the consumer, but by putting everything under all this consumer protection agency, are they going to become part of the rate-making process? That could make the process of approvals more cumbersome and lengthy which we should be going the other way and streamlining the process. So I have concerns about that,” said Seward.
Seward said he thinks there is an opportunity to consolidate some of the consumer protection but “to put it in this new Financial Regulation unit, I have concerns that it will slow down this who le process of regulation, which is contrary to where we need to be. We need to streamline and modernize, rather than slow down. You know, decisions, rates, forms, products should be made on sound actuarial principles of accepted suitability criteria. That’s the traditional function of the department. We have fought for years to have so-called consumer advocate replaced in the Insurance Department, because of the fat that I felt it was a duplication and not necessary and this may be the same thing in a different way. So that another area where we need to have further discussions.”
Michael Barrett, legislative representative for the Independent Insurance Agents and Brokers of New York said basically we support the idea of merger with some caveats. “It has worked well in some other states, most notably New Jersey,” explained Barrett. The Banking and Insurance Departments, that merger has gone well. I think where you get into some questions with the Governor’s proposal is, how do you layer in the Consumer Protection Board into this process?
“What we really would like to do and have been urging them (the Governor’s office), to continue to improve the regulatory climate for insurance companies, agents and brokers and the industry basically in New York State. We think that this proposal certainly gives an opportunity to continue to make improvements in the climate. The staff of the Department of Insurance has been committed to trying to be efficient as they handle these filings for different products and rate filings that companies try to get into the marketplace,” Barrett said.
The New York Insurance Association Inc. has filed suit to stop New York’s illegal diversion of insurance assessments to fund noninsurance programs. The suit which was filed in State Supreme Court in Albany county, is referred to as “332” and charges that the assessment increase is a financial hardship to New York domestic insurers. “The assessment increase is a financial hardship to New York domestic insurers, but what is especially galling is that the increase is being used in ways that are blatantly contrary to what the law stipulates,” Melshionni, President of NYIA, Inc. According to NYIA, the 2009-10 state budget includes nearly $455 million in assessments on insurers with $317 million in sub-allocations to other state agencies. In 2000-01 NYSID’s budget was roughly $100 million with approximately $14 million in sub-allocations, meaning that NYSID’s budget has quadrupled and the amount of sub-allocations has increased more than 22 times.
NYIA also noted that the property and casualty insurance industry is a vital component of New York’s economy, employing 35,000 New Yorkers and investing more than $22 billion in New York municipal bonds.
Michael Barrett said they were not sure that the answer is as to whether through the original proposal talked about some cost increases,” We are looking forward to taking a closer look at those increases. Ideally the consolidation would lead to some reduces costs, because the Banking Department and Insurance Department are funded by their respective clients.”
Barrett also questions how do you fund the consumer protection piece? “And that gets back to my original point, how does the Consumer Protection Board get integrated into this new, consolidated entity? I would not want to see the costs increase and I think most of the industry is united with that idea in mind.”
“One other area that is of concern to the industry is some of the penalty increases in the legislation. This proposal has been around for several years with some dramatic increases in penalties. But I think one prime example is this issue of doing business without an insurance license. Currently it is a $500 fine. This proposal in this new legislation is to raise it to $10,000. We think that increase is too much and we will be talking to the Governor about that and suggest something more moderate,” said Barrett.
In many instances, Barrett said an agent or broker forgets to or messes up their license renewal, which has happened from time to time. “Technically they are practicing with la license. Certainly they should be fined but not $10,000. A small agent or broker, can be put out of business with that kind of fine for a mistake. We all agree to go after the bad guys, but this penalty is too much at one time.”
Senator Seward said there are other things to be discussed about the insurance industry, including a cooperative insurance company premium tax in the budget that’s a $25 million hit on the cooperative insurance companies of the state which currently do not pay a premium tax. “The big one in my area is New York Central Mutual,” said Senator Seward. “That hits them about $8 million. Basically, their business plan does not include paying this tax. This proposal has been around a while, I think Governor Pataki was the first to suggest it. We have always beaten it back.”
“The other budget-related item is the excess line insurance. These are usually hard to place insurance and it gets tricky. The question is where are you going to pay your taxes if you have coverage in multiple states? The federal government has given the states until July to figure out some way to avoid this issue,” explained Seward. “Right now the brokers have to figure out the percentage of coverage in each state. It’s quite a burden on our excess line brokers. There are two different proposals out there. The NAIC, they want to form a multi- state agreement whereby all the commissioners of insurance, the state legislative bodies, like the National Conference of Insurance Legislators and NCSL and the National Council of State Legislatures, and the Council of State Government (CSG), they have all lined up in favor of having states join a compact. In other words, you write one check and they would sort out where the appropriate taxes would have to go. I think the premium taxes ought to go to the state,” said Seward. “I’m going to introduce SLIMPACT to have the states join a compact to sort this out, where the taxes go.”
“The other big issue of the year will be in the area of no fault reform,” said Senator Seward. “We are going through a cycle now where no fault premiums are going up in the auto area. Fraud seems to be on the increase, particularly in the downstate region. The rates are up and fraud is up. We’ve just come off a period where insurance company investments are not performing. When their investments are doing well, that provides a buffer for premium increases. So as the stock market does better, that should ease up a bit but that is the other thing that is likely to drive up the rates if their investment portfolio is doing poorly, it hurts their reserve position and they have to look to the premium rate payers.”
“The merger seems to be a priority of the Governor and they have got people working on it. As I say, we are willing to talk but there are some big problems with what they have presented us so far. It all depends on how flexible they want to be, whether we will ever get anywhere on that. So that is huge,” said Senator Seward. “The other most important piece of legislation is the no fault reform. It is always difficult because there are so many competing interests. The trial bar, the insurance carriers, the medical profession. The big three – they have their own agenda. So that makes it very difficult to try to form a consensus,” Senator Seward said. Michael Barrett said, “Hopefully we can iron out some of these issues and I’m not sure of the answer. I think it can work this year if the legislation is passed and you spend the rest of the year trying to integrate functions. If you pass it this year and start working on the integration of the merger, and during the course of most of this calendar year, you could get most of the pieces in place. We are continuing to have dialogue with the Governor’s staff to see where we can improve things in this proposal or continue to improve the marketplace.” Ellen Melchionni of NYIA said the Governor wants to put the welcome mat out for business. “The 2% tax on cooperatives is not, the no increase in the overall budget is not. No reduction in these, what we call ‘illegal’ sub allocations. If he is trying to attract business to New York, he has an opportunity here. And he can use this consolidator as an opportunity to make change and provide cost savings to businesses. But as the budget is currently drafted, we don’t see the savings. We are hoping that over the amendment period, we are going to continue to meet with them and offer suggestions and recommendations, and we are hoping at the end of the day when they issue a revised budget, some of the recommendations that we are giving them will be in there.”
“This is a pretty big change,” explained Melchionni. “I don’t know if they really want this in the budget, done separately or not, but it’s a lot for people to digest. And there are a lot of ‘what ifs’ and unanswered questions about what the intent is. I think what they have put in front of us, if you want to poke holes in it and be a naysayer, you can. There’s a lot of unanswered questions and people are skeptical and they are suspect. However, I think they have good intentions and I think if things were clarified more it might reduce some of the anxiety that people are feeling.”
“I understand it has to be done in two phases. Phase two will have more meat on the bone and muscles and it will be more defined in terms of who is going to do what and who is going to fund what and what the formulas are going to be. And phase 3 will be the skin on the bones and once it’s up and running and what it really looks like and how it will work,” Melchionni said.
“As I said in the beginning, I understand conceptually what the Governor is trying to accomplish. And I understand why he has to do it in phases and in pieces. You can’t walk before you have the muscles on and everything else,” said Melchionni. “As long as we keep communicating and we are able to provide input and to help shape what this looks like, and they are willing to listen to our concerns, it is an opportunity and potentially could save businesses money.”
