The Commissioners: Howard Mills

Lessons on broker compensation and filling the gaps in state regulation

Howard Mills, formerly an elected state representative, served the State of New York as its appointed insurance superintendent for the last two years. He stepped in to fill the shoes of Greg Serio when he departed and Mills himself stepped aside in December to make way for Eric Dinallo, newly-elected Gov. Eliot Spitzer’s nominee for the post. Before he stepped down, Mills spoke with Insurance Journal’s Andrea Ortega Wells at the winter meeting of the National Association of Insurance Commissioners.

Since the interview, Mills has joined Deloitte & Touche USA LLP as chief advisor with its insurance industry group.

The following is an edited version of the interview. The complete video interview is available at www.insurnacejournal/broadcast, in the video section of the Web site.

Looking back at the past two years, what were some highlights in your tenure as insurance superintendent?
Mills: I actually think that the entire two years of my tenure were a highlight. I came in at a time of great turmoil, really, in the industry. There were the Attorney General Spitzer investigations going on, finite re, and we had some issues of particular concern in New York with our workers’ compensation fund.

Then nationally or internationally there were huge issues. The expiration of the terrorism risk insurance program in my first year was something I spent a lot of time on. I’ve been working on international issues with the IAIS [International Association of Insurance Supervisors] on the reinsurance collateral rule for ailing reinsurers, for example … So there have been many, many issues, and it has been a very exciting time.

What are some lessons you learned?
Mills: Well, the absolutely critical role that the insurance industry plays in the global economy, our national economy, and in New York State. It is the underpinning of all economic activity. And we have so many really pressing issues. We saw, last year with Katrina, the importance of being prepared for mega catastrophe and the impact it can have on our national and global economy, the role of reinsurance. So I have learned that we really need to do a lot of work in improving regulation.

We really do have a very inefficient system regulating insurance. The state based system does have some strengths. I think that we in New York do certain things very, very well, as other states do, like solvency monitoring and consumer protection. But we need to do a much better job on speed-to-market issues, on transportability of products, getting new products to the market quicker, enable the industry to be faster in their innovation. That ultimately benefits the consumer.

I do think that we need a greater role of the federal government in regulating insurance, so that we can move things like a national approach to dealing with natural catastrophes, dedicated CAT reserving, for example and move issues of international consequence like the reinsurance collateral issue much faster than the state-based system has been able to deal with it thus far.

Did your background as a legislator help you as a regulator in some way?
Mills: It definitely did. Coming from an elected background in the legislature, you deal with a lot of diverse, different people. I mean, my job as Insurance Superintendent of New York is a lot of balancing. On the one hand, you have to protect the consumers of insurance in New York State. That is a primary focus of our mission.

But you also have to maintain an environment that is conducive to the conduct of the insurance industry, so that the business is there, the market is strong, and people have options, and that requires some balancing.

I think that we have struck the right balance in the last two years. We are tough on the industry where we need to be, but we still have a situation where the market in New York is strong and competitive, and that is a function of having an environment that is seen as something that the industry wants to do business in our market.

Your state was certainly the leader in the agency compensation and disclosure issue. How you feel about the deals that have come out of the investigation?
Mills: Well, we have done a lot in the area of transparency, which is critical. Our focus in working cooperatively with Attorney General and soon-to-be-Governor Spitzer has been to bring transparency to the process, to enable consumers to understand what it is that they are getting, what they are buying.

On agents and brokers we have been working to get them more involved and more buy-in from the insurance industry on transparency; and now we have a lot of work to do in establishing a level playing field. Some agencies, some of the world’s biggest brokers, obviously signed agreements where they have given up contingent commissions, but they remain the norm throughout most of the industry.

We have had a position in New York, partly I think due to my experience as a legislator, that that is really an issue of such importance that we think that the legislature needs to weigh in. It is not something that I thought I should have done by regulation, just extending the ban on contingent commissions throughout the whole industry in New York. That is something the legislature needs to weigh.

Main Street agents have been very vocal in that they feel they are being caught up in all these issues that came from the mega brokers. What do you have to say about that? Should the same standards be used for Main Street agents as these large national brokers?
Mills: My sensitivity to the differences between the mega brokers and the Main Street brokers, the smaller brokers in upstate New York, is the reason why I didn’t just push from a regulatory point of view to extend the ban across the whole spectrum. I have that sensitivity as a legislator. I understand that the smaller businesses, the smaller brokers are different than the mega brokers. And that’s why I believe that deferring that to the legislature was the proper way to deal with it.

The legislature will by definition and necessity take, I think, the balanced view and would understand the differences between the small Main Street broker as you say and the mega broker. That’s why we’ve gone and exhibited some prudence in how we’ve dealt with that issue.

How do you feel about state attorneys general being involved in insurance issues?
Mills: I have felt that there needs to be a lot of cooperation between insurance departments and state attorney generals. One of the things I did when I came in was, I looked at why Attorney General Spitzer was so involved in the insurance sector in New York and tried to understand why it was that that happened. I concluded that there had been a vacuum and that the regulators were largely responsible for that vacuum, and the attorney general leapt in.

What we have attempted to do is to correct that situation. I’ll give you two examples. We had been operating on a periodic exam format, the tried and true, you go in every five years, you look at the company A-Z, and we realized that, number one, it was putting us in a situation where we were looking at five year-old data, while the attorney general was looking at things in real time.

So we’ve switched and we are now doing risk-based exams. It allows us to be much more proactive, spotlight issues and problems before hand, hopefully before they’ve because major issues.

We’ve done in that in conjunction with establishing our own Corporate Practices Unit within the insurance department with attorneys with investigatory experience like the attorney general has. So now when we spot a problem, hopefully with a risk-based exam format, our attorneys from our Corporate Practices Unit can come in and if they find criminal wrongdoing, of course, we immediately would give it to the attorney general, and prosecute in a very tough fashion.

We hope to be able to find problems before they become full blown and avoid a lot of the collateral damage, if you will, that we’ve seen in some of these investigations in recent years.

Do you have any concerns for the insurance market that may come under the Spitzer administration?
Mills: I think that Governor-Elect Spitzer certainly understands the critical role of the insurance industry. I am absolutely convinced that he has every intention of doing what he needs to do to create and maintain a strong market for insurance in New York State. It is critical for the consumers of insurance and for our state and national economy.

So, I have no concerns. And I’m sure that my successor will understand, as I do, the absolutely critical nature of the insurance industry. We’ll work to foster a strong viable market in the state of New York.

Do you have any advice for that successor?
Mills: It would be premature of me, we don’t know who my successor is going to be, but I will tell you that as soon as my successor is announced, I will be reaching out and offering any assistance that I can. And if he or she feels that I can be helpful to them in any way I would be very happy to do it.

I have enjoyed this job very much. I really care about the insurance department, the insurance consumers in New York State and of course, the insurance industry and I expect to remain involved in it, so I’ll do anything I can to help my successor be successful in the job.

Do you think there is any benefit from the appointed insurance commissioner or superintendent versus an elected official?
Mills: I really do. And no offense to some of my elected colleagues, but I do believe that an appointed system is better than elected. Certainly it is in New York.