Written by Teresa Zink

 

In normal times the answer you get when you ask –  “What are the important issues facing the insurance and reinsurance industries?” – depends largely on who is in the room.  But these are not normal times. 

 

“The global economic crisis has edged out most other issues and is THE topic driving everything else in the insurance and reinsurance industry right now,” says long time insurance and reinsurance attorney James Veach of New York’s Mound Cotton Wollan & Greengrass.

 

“The meltdown feeds right into the fight between federal and state regulation,” Veach says.  “We saw it in Washington when Senator John Sununu wrote his letter to the Wall Street Journal during the NAIC fall meeting in D.C. and set off a firestorm among the state insurance commissioners.  We saw it when New York Insurance Superintendant Eric Dinallo went on 60 Minutes and explained that most of the problems at the world’s largest insurer arose in areas that he has no authority to regulate.” 

 

[NOTE:  This and many other important issues will be discussed at the SIXTEENTH Annual Insolvency & Reinsurance Roundtable coming up in April.  Click here for more info.  See you there!]

 

Competing forces are at work, Veach explains.  “On the one hand we have Mr. Paulson and the Federal Reserve and the U.S. Treasury getting more and more involved in financing and supporting insurance entities, which seems to go hand in hand with federal regulation.  At the same time, the lack of federal oversight caused many of these problems in the first place.”

 

 State regulators, with good reason, tend to believe the entities they regulate have held up beautifully and that the state model for regulation works, says Veach.  What is driving a lot of these companies down arose in areas that state insurance commissioners “were explicitly told they couldn’t regulate.”

  

While there have been signs of increased willingness by state regulators to cooperate with federal authorities, “there are a number of regulators within the NAIC who are not enthusiastic about this cooperation,” according to Veach.  Elected commissioners in particular believe that “they did their jobs and there is no reason to defer to federal regulators when there are so many other examples of federal regulation that went awry.”

 

An issue that deserves particular attention is the move toward principles-based accounting promoted by the Sarbanes-Oxley Act of 2002, and the relaxation of collateral requirements for foreign reinsurers, according to Veach.   

 

Principles-based accounting is concerning, Veach explains, to the extent that it relates generally to self-regulation and de-regulation.   Recent events may give the proponents of principles-based regulation of insurance pause.  “Nobody knows fully how moving to principles-based regulation will ultimately work.  It is an unknown.”

 

Anecdotally, Veach has heard that some of those applying principals-based concepts in Europe and the U.K. find it to be more difficult from a compliance perspective “because nobody knows where the edge of the cliff is.”  With a rules-based approach “there was a line and you could get up to the line and you could teeter on the line,” Veach explains.  With a principles-based approach “you have these principles there, guiding you, but if you go to the regulator and say ‘On a principles based basis can you tell me if I am on the line or over the line?’ it is almost impossible to get an answer.”

 

According to Veach, “All these events, I think, may have people reconsidering the value of the principles-based rules.”

 

Where should we go?  “I think people should insert themselves into the debate about whether we want to use these self-regulatory principles or whether the dangers are such that people want to see fewer bad things happening to good people even,” according to Veach.  “It is one thing if you place a bet, and it is a bad bet and it causes you harm.   It is another thing if you place a bet that hurts everyone in sight.”

  

The issue makes Veach think of the New York Insurance Exchange and efforts by Superintendent Dinallo and others to get the Exchange back on its feet.  “I know people who are interested in investing who would love to see this happen,” Veach says.  “But if you talk to people who were there at the time the Exchange was going, one of the reasons that the Exchange failed was the lack of self-regulation within the Exchange.  The participants in the Exchange and those who were responsible for running it, had an opportunity to oversee, on their own, without the Superintendent’s oversight.  They had the opportunity to reign in a lot of bad underwriting and oversee how these syndicates were being used but they didn’t do it.”

 

 “This time,” however, Veach trusts, “if the Exchange gets back up on its feet and moves forward, a largely self-regulated Exchange will have another opportunity to get it right.”

 

James Veach is a partner at the New York law firm of Mound Cotton Wollan & Greengrass.  For more than 20 years, he has focused his practice on reinsurance and insurance regulation, litigation, arbitration and government relations.  He was interviewed for BVR Legal by freelance writer Teresa Zink, former editor of Mealey’s Litigation Report: Reinsurance and Mealey’s Litigation Report: Insurance Insolvency, both LexisNexis reports.

 

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