N.Y Vows Principles-Based Regulation

New York Insurance Superintendent Eric Dinallo has released a draft regulation that he says would make the New York Insurance Department the first in the nation to establish principles-based regulation. The draft includes 10 principles for the industry and is accompanied by 10 principles for regulators.

The draft regulation will be the agenda of the New York State Commission to Modernize the Regulation of Financial Services, which Dinallo chairs.

Principles-based regulation focuses on assuring desired outcomes more than the details or technicalities of traditional regulation. It aims to reduce unnecessary and inconsistent regulation and hold regulated companies to ethical practices, while also providing consumers with more efficient markets and better responsiveness.

Dinallo said the switch to this type of regulation is needed for New York to remain the financial capital of the world. “The financial services marketplace is extremely creative and innovative and our regulation must be just as nimble,” he said, pointing to principles-based regulation as the “best way to protect consumers and promote fair and honest competition.”

Focus on Outcomes

“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.

He stressed that 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,” he added.

The principles ask companies to be ethical to their core, rather than focusing on technical requirements. If a company is generally conforming to the principles, but violates a rule in a way that does not harm the public, Dinallo said the state should take that into account.

The modernization commission will discuss the principles at its upcoming January meeting.

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, according to Dinallo.

This is the third draft regulation from the department that reflects the 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.

A copy of the principles is available on the department’s Web site.