Industry the March 2012 issue

Tape Dispenser

New York’s Superintendent Benjamin Lawsky talks deregulation…
By Ed Leefeldt Posted on March 11, 2012

When Benjamin Lawsky was named last fall as the head of New York state’s Department of Financial Services (DFS)—a merger of the former departments of banking and insurance—he was widely seen as a potential threat to insurers. Would he follow the path of former governor and attorney general Eliot Spitzer, who took on the industry in a mega-battle that nearly toppled AIG, the world’s largest insurer?

Last April, a month after DFS was authorized by the state legislature, the influential Atlanta law firm Sutherland Asbill & Brennan warned that insurers should be aware “of the new legal risks” stemming from the formation of the department. Industry fears were heightened because Lawsky spent five years as an assistant federal prosecutor for white-collar crime, organized crime and terrorism in downstate New York and had served as chief of staff for Gov. Andrew Cuomo, a former attorney general who also has taken on powerful companies such as AIG.

Lawsky officially took control of DFS and its $2.2 trillion in depositary assets last October.

A month later he spoke to a meeting of the New York Insurance Association. Introducing Lawsky, association president Ellen Melchionni said the group had supported the move to create the new department. “But we’ll fight if we have to,” she said.

They might have to. In his first few months in office, Lawsky’s activist side was on full display. He forced health insurers to publicly disclose their rate applications; reduced requested rate increases by 35%, a move estimated to save New Yorkers more than $400 million in 2012; made life insurers turn millions of dollars in death benefits over to consumers; and cracked down on workers comp fraud.

But Lawsky’s recent actions, such as cutting the red tape involved in selling insurance to big companies that use brokers, his speeches to groups like the New York Insurance Association and his comments made in a lengthy interview with Leader’s Edge, show that he is willing to work with, and even help streamline, an industry entangled in a multitude of state-run bureaucracies—including his own.

LEADER’S EDGE: Your position atop the banking, insurance, capital markets and real estate financing industries in New York arguably makes you the most powerful regulator, and certainly the most powerful insurance regulator, in the country. Is this a fair assessment?
BENJAMIN LAWSKY: New York has historically been a leading regulator of both the banking and insurance industries, and that will not change. The merger of the former insurance and banking departments combines the strengths of two of the nation’s premier regulators. Their consolidation into the Department of Financial Services gives New York a more effective regulator to enable better and broader oversight.

The new agency has three strategic objectives: maintaining New York’s leadership as the world’s business capital and continuing to generate financial services jobs in the state; protecting consumers and working to prevent systemic risk; and building an agency that serves as a model of efficient, effective government.

How will you work with federal agencies?

New York will work closely with our federal counterparts, the New York Fed, the FDIC and the new Federal Insurance Office. We want to have a strong, seamless relationship with those agencies, and we believe that type of working relationship will enable DFS to be a strong regulator that is able to both promote the growth of business and protect consumer interests.

How are you handling communications with New York Attorney General Eric Schneiderman, who has similar powers to your own?

We have always had good communications with the AG’s office, and that will continue. There are significant differences between the powers of a law enforcement officer, such as the attorney general, and a regulator, such as DFS.

Does the recently enacted Financial Services Law give you broad-ranging powers, even prosecutorial powers, over these industries?

Our department has the authority to investigate but not to indict. We intend to use investigative powers aggressively and deliberately when we are required to do so. And we will work closely with prosecutors and law enforcement authorities when legal action is needed to ensure corrective actions.

Beyond enforcement issues, one of the great things about the merger of the insurance and banking agencies is that a combined DFS will enable us to step back and get a very broad picture of trends across the entire spectrum of financial services.

Did Gov. Cuomo and the state legislature push for this broad-reaching mandate because systemic abuse was becoming too prevalent?

Gov. Cuomo recognized that the state needed to close regulatory gaps created by a system of regulation that was limited to oversight of specific industries and specific products. He recognized that the state needed a regulatory regime that was able to keep pace with an industry whose financial products have become far more complex and sophisticated.

The governor also recognized that we could achieve operational efficiencies—and create savings for the industries that fund us—by combining certain business operations common to both departments.

If New York had run a combined banking and insurance regulation department, could it have prevented AIG’s misadventure in credit default swaps and the resulting debacle?

It’s impossible to say what might have happened in the past under different circumstances. The point is that a more effective regulator, with significantly broader oversight, is far more likely to recognize and help avoid systemic risk in the future.

Did New York take the lead in banking and insurance regulation because federal government agencies like the SEC and the [former] Office of Thrift Supervision dropped the ball?

I’ll leave it to others to evaluate the performance of these agencies. At the state level, we take our role very seriously as regulators and our responsibility to protect both consumers and honest businesses from the actions of those who would engage in dangerous or deceptive business practices.

Did you model the Department of Financial Services after any other jurisdictions that operate in this fashion?

When the administration crafted the legislation to form this new department, it did study lessons learned in other states. However, New York is unique. We are the business capital of the world. So much of our work will be groundbreaking as we forge ahead with consolidated financial services oversight.

State banking and insurance department examiners were paid at different rates. Have you resolved this issue, and how will you combine these two different cultures? What about the separate office buildings in which these departments are housed?

There are always challenges when you consolidate different organizations, and we’ll work through those challenges as we move forward. I’m confident we will succeed because the new organization that we’re building is staffed by skilled and dedicated professionals from both former departments. One of our important short-term objectives is to bring everyone together under one roof, and we hope to achieve this in the not-too-distant future.

You’ve talked about cost savings of $25 million in the first year. Are we likely to see cutbacks?

We’ve already saved money by consolidating business operations common to both agencies, but we won’t sacrifice our core mission of regulating financial services.

Conversely, a generation of insurance and banking professionals is nearing retirement. What is your department doing to recruit the next generation of sophisticated and well rounded regulators?

State government has seen a large number of experienced people retire in recent years, so we’re taking dual actions to lessen the impact. We are providing existing staff with tools and opportunities to enhance their skills and knowledge as they prepare to take over the roles and responsibilities of those who retire. We’re also ensuring that recruitment of new, entry-level regulatory staff with appropriate education and experience is done by targeting colleges and professional organizations.

What should New York’s role be in national and international regulatory efforts like the NAIC and the International Association of Regulatory Supervisors?

New York will continue to play a very active role with the NAIC, the International Association of Insurance Supervisors and other regulatory organizations. New York insurance regulators have held important positions on the committees and subcommittees of these policy-making organizations in the past, and we expect to see our involvement continue in the future. We also look forward to working closely with the Federal Insurance Office on international insurance issues.

How do you view Dodd-Frank and the new oversight council to evaluate systemic risk?

Since Dodd-Frank is new and complex legislation that is still unfolding, we’ll continue to monitor how the act affects our department’s ability to ensure the financial soundness of insurers regulated by New York. However, there is strong state-based regulation of insurance, so we don’t expect Dodd-Frank to have a material effect on insurance.

How do you plan to implement the aspects of the Affordable Care Act, such as the health exchange that comes into existence in 2014?

We believe that it is essential to build a New York exchange that meets the needs of our state’s businesses and consumers. Small-business owners have repeatedly told our department that one of the biggest impediments to growing their businesses and creating jobs is their inability to offer employees affordable and adequate health insurance.

A health insurance exchange will help make coverage more affordable in several ways. First, federal subsidies will help consumers and small businesses pay for coverage. Second, standardizing insurance coverage will allow consumers to comparison shop and improve competition based on price and quality. And third, the exchange can pool the purchasing power of individuals and small groups to get big-group discounts. Importantly, the exchange will feature a Small Business Health Options Program (SHOP) to help employers enroll their employees in qualified health plans offered in the group market. Passing the exchange legislation will be one of our top priorities in 2012.

One bright spot of healthcare reform is that the public now can see and comment on health insurer rate requests. Much of the data contained in insurer filings was previously considered confidential, so the public couldn’t see it. By working with health insurers, our department succeeded in getting them to disclose the information in the filings. This will enable members of the public to have more meaningful input into the process. The disclosure of health insurer filings is a great example of how our department and the industry worked together.

You’ve already defined your twin goals as “keeping New York as the financial capital of the world” and “protecting consumers better than ever.” Many insurers complain about unnecessary rules and regulations. Are there rules you can get rid of without hurting consumers, and are there rules that can be put in place without hurting business competitiveness?

DFS needs to be a smart regulator. Protecting consumers and encouraging the growth of financial services are not mutually exclusive. A great example is our recent action to deregulate filing requirements for certain large commercial insurance transactions where insureds retain their own special risk managers to assist in negotiating and purchasing policies. Deregulating the filing requirements for these transactions was a practical, common-sense approach. It’s been well received by the industry because it will increase speed to market for certain insurance products and help eliminate barriers to economic development.

What specific initiatives are you considering to create jobs and make New York a more business-friendly climate?

New York is a major business center for leading insurance companies, and we intend to maintain and strengthen that status. We’ll not only encourage firms to expand their New York-based operations, but we’ll encourage them to consider moving their base of operations to New York. It’s a great place to live and work. It’s the world’s premier business address, and we intend to keep it that way.

I understand that you must form a working group by June 30 to examine ways to improve the efficiency of banking and insurance regulation and that it has to include representation from both groups. Do you view this as a way to learn and educate at the same time, and how do you intend to interact with insurers and bankers?

As regulators, my staff and I have spent a great deal of time meeting with people from insurance and banking so that we understand industry concerns. The insurance and banking communities know that our mission is to protect consumers while encouraging business growth.

You’ve had a distinguished career in government as a prosecutor on high-profile insider trading, white-collar and terrorism cases. You’ve also worked for New York’s senior senator, Chuck Schumer, and ultimately as Gov. Cuomo’s chief of staff. What lessons have you learned, particularly from working so closely with Gov. Cuomo?

Sen. Schumer and Gov. Cuomo are superb leaders, and I learned a great deal working with them. The main lessons are hard work, hard work, hard work. Always be a very careful listener and build a strong team. It’s also essential to have a clear vision of the direction in which an organization needs to move, the goals it needs to achieve, and a planned strategy to successfully achieve its objectives.

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