A Talk with New York Superintendent of Insurance Howard Mills
Pataki’s appointee brings Albany background to Spitzer-era regulatory challenges
I think I’m a pretty quick study,” Howard Mills told Insurance Journal.
He’s not had much choice. The former Republican Assemblyman from New York’s Orange County was nominated by Gov. George Pataki to succeed Gregory Serio as the state’s Superintendent of Insurance last December. Since joining the N.Y. State Insurance Department in January, the still “acting” Superintendent Mills has “jumped with both feet” into the thick of major controversies involving brokerage compensation, finite reinsurance and financial disclosure, never letting the fact that the state Senate in Albany has yet to officially confirm his appointment slow him down.
Confirmation expected
“It’s expected very, very soon … in the very near future,” Mills said of his Senate confirmation, suggesting that lawmakers will begin addressing other matters now that they have passed a state budget. The nominee will face questioning from both the insurance committee and the finance committee before his name goes to the full Senate but expects to be confirmed with out a hitch. “I’ve met with members of both parties on both committees and they’ve pledged their support,” he said in a recent interview with Insurance Journal.
(On May 9, the insurance committee approved his nomination and the finance committee was expected to follow suit.)
Albany’s language
Mills’ ability to speak the language of legislators in Albany could be one of his strong suits, one he will be playing a lot as he attempts to lead the department in the post-Spitzer regulatory era.
“My service in the Assembly and on the insurance committee was a good introduction,” Mills said when asked about his preparation for this new assignment. Equally important, he added, was his job as town supervisor in Walkill, where one of his major responsibilities involved the town’s self-insurance program.
While he thinks he is well prepared for the job, he admits he has been through a “crash course” on some issues including brokerage compensation and finite reinsurance since first showing up at the NYSID offices on Beaver Street in January. He was able to benefit by overlapping with Serio’s last month on the job but his real education has come from the department’s personnel, whom he calls “dedicated professionals” and some of the best in the country. “We have a lot of institutional memory here,” he added.
TRIA priority
His “most intense experience” thus far has been working for the renewal of the Terror Risk Insurance Act, the federal government’s backstop for terror coverage that the insurance industry is hoping Congress will renew.
“We’ve been working hard on that, lobbying Congress, and doing a lot with the private sector including the real estate board,” he told Insurance Journal. He is passionate about the need for TRIA, not only for New York but also for the entire economy.
“It’s important nationally and internationally. There is a tendency by some to view it as a New York or a big city issue and they just could not be more wrong,” he insisted, maintaining that another terrorist attack in New York would have serious economic ramifications in real estate and construction not just for the city and state but for the global economy.
“The federal government has a role,” he said. “The private insurance industry is just not capable in the event of a catastrophic terrorist attack of absorbing the loss.”
Without TRIA, he cautioned there would be a “very, very significant depression” in the real estate and construction industries in the city, which along with financial community, drive the economy of New York.
Risk-based exams
While he has been most visible on TRIA, Mills has also been working internally on a number of matters as he attempts to position the department to operate in the new world of regulation following the various investigations by N.Y. Attorney General Elliot Spitzer, the Securities and Exchange Commission, his own agency and other officials.
In response to those investigations, Mills has already decided to alter the department’s examining procedures, moving from periodic exams to “risk-based” exams. Historically, the department examined the practices and accounting of insurers on a regular schedule, often every three or four years, regardless of any particular concerns. Mills now prefers to have his agency examine insurers in specific areas of operation, such as reserves, when there is cause for concern. These exams might occur more frequently than under the periodic routine.
“This means we can go in at any time and focus on a specific area,” and be done with the exam faster. “We’re not stuck on that schedule, if we feel we need to go more frequently, we can do that.”
A risk-based exam is also less intrusive for insurance companies, according to the regulator, who added that some periodic exams might still be warranted.
Corporate practices
The need for more risk based exams is one lesson the department has taken from the ongoing investigations. Another is that the department lacks some of the tools to effectively monitor and investigate corporate practices. So Mills is setting up what he terms a corporate practices unit, a staff of lawyers and other experts who will be supervised by the department’s legal and capital markets units. “We’ve got some very experienced people here some if the best in the country and we’ll give them the flexibility they need to really examine companies’ practices,” he vowed.
In the wake of the AIG admissions that some reinsurance transactions may not have been reported properly or transferred risk as required, Mills has also changed the department’s rules for the reporting of finite reinsurance transactions. His first circular letter requires the chief executive officers of insurers to attest that the information on reinsurance is truthful, that there are no hidden agreements, and that there are files to document an actual transfer of risk.
Hiring extra attorneys to oversee corporate governance might require help from lawmakers, as will another tool Mills hopes to attain, the ability to summarily suspend or revoke licenses of licensees when it suspects wrongdoing without going through typical hearings or procedures, which now keep the department from acting promptly in such circumstances.
His legislative agenda also calls for continuing the fight against fraud by boosting the penalties for fraud. “We’ve come a long way on auto fraud by regulation but what we really need to do is make penalties tougher,” Mills said. “Only the legislature can make penalties for fraud much, much, much tougher. They’re a joke right now to be perfectly candid about it. I’m hoping my experience as a legislator will enable me to make some inroads with legislators on this.”
Health insurance rate regulation is also on his Albany shopping list. Mills wants to change the current file-and-use law so that health insurers are required to obtain insurance department approval for any rate increase above 10 percent.
Regulatory philosophy
While he will be drawing on his legislative experience to help get the department the tools it needs, Mills will also be referencing his background in elected office as a guide to how he regulates the industry.
“My philosophy is going to be similar to what is it has been as an elected official, although it’s a different role. I view our role at the department as number one to protect consumer and number two to foster an environment that is hospitable to the insurance industry in New York State. Insurance is a critical part of the infrastructure and the economy. New York has been and is home to some of the great insurance companies in the word and we want to keep it that way,” he told Insurance Journal.
“My philosophy is limited regulation, limited government but clearly we need regulation; there is a role for regulation. The challenge is not to overreact, not to overstep the role. That’s the balance we will try to keep.”
Mills said he will adhere to the management style he used when he was town supervisor, which involves understanding the issues the department faces, while recognizing the talent in the department and delegating to them. “This department is very unique in that all levels have a lot of regular interaction with the private sector which creates a very professional group,” he observed.
Federal government
While Mills is adamant that the federal government has a role to play in terrorism coverage, he is more cautious when identifying what Uncle Sam’s involvement in other insurance regulation might be.
“My view is if Congress is going to go down this path, I want to be engaged in the process, I want to be active in shaping any legislation,” he said. He maintained that “there will still be a strong and clear role for state regulation to play.”
He said he is worried that a federal agency might water down the quality of regulation compared to what New York does. “The history of federal regulation bears this out that if there is a strong federal regulation of insurance, we will see standards sink to the lowest level rather than rise to the highest level like we have here in New York State and that will not benefit the consumer.”
Working with SEC, AG
His agency has played a “significant” role in the ongoing brokerage, reinsurance, American International Group, and other investigations along with the SEC, Spitzer and other officials, according to Mills. The department’s role has included educating state and federal authorities on what can be very complex insurance transactions.
“Both the SEC and the AG are relying upon our department for the expertise to understand some of these transactions … Frankly some of these folks needed our help to determine if some of these were potentially problematic. So our expertise is driving to a large extent the investigations we see today.”
Lesson for industry
Just as the agency he now heads has learned from the ongoing investigations, he suggested that the industry also has an important lesson to take away:
“That it is a new regulatory climate and number one the industry has to be truthful, forthright and completely candid and transparent with the regulators. When you have a major company admitting they lied, that’s a pretty serious problem. These exams are based in large part on the presumption that both parties are acting in good faith and when that’s compromised, you have a problem. That’s the major lesson the industry should learn.”
Main Street agents
The insurance chief expressed the hope that the scandals would not tarnish the reputation of the entire industry.
“The sad thing is… that some of the media coverage and some people paint with a broad brush. Let’s not obscure the fact this insurance industry is a very important, great industry. It is one of the critical elements to the infrastructure of our national economy. Insurance touches everyone in some capacity. And the industry is overwhelming made up of very, very honest individuals who perform a critical service.” he told Insurance Journal.
He vowed to reflect that opinion in any regulatory response to the broker compensation issue in particular, where he drew a distinction between large public insurance brokers and typical hometown independent agents.
“I do see that distinction and I’ve been making that case …That’s one of the reasons with regard to contingent commissions that I believe it’s not the regulator’s proper role to issue a regulatory prohibition on the use of these types of broker compensation…It needs to be addressed by the legislature. I recognize and I think the legislature will recognize there is a difference between huge mega brokers and Main Street agents. That’s why we’re being very careful not to overreact with a regulation that might hurt the industry and by extension hurt the consumer.”
The former elected representative now serves at the pleasure of the governor. Would he ever run for office again? “I love public service and would never rule it out,” he admitted, although he stressed that he is “totally focused on doing a good job” in his new appointed position.
The complete Insurance Journal interview with Superintendent Mills is available in audio at www.insurancejournal.com.