The Liquidation Process in New York - Part IV-B: Information Highway or By-way?

As discussed in the first part of this installment (Part IV-A posted on November 13, 2008), the statutory reporting requirements on the receiver and his agents, including the Liquidation Bureau, are limited and not necessarily helpful to policyholders, claimants and other interested parties. Despite all the noise about transparency, the information available is generally what the Liquidation Bureau decides to disclose rather than what interested parties want to know. Is it any different for New York’s several insurance security/guaranty funds?

As discussed in part III of this series (posted October 9, 2008), New York has five (5) insurance security/guaranty funds. There are three non-life security funds administered by the superintendent of insurance: the property/casualty fund, the workers comp fund and the public motor vehicle liability fund. The Life Insurance Company Guaranty Corporation, a separate entity with its own Board of life industry representatives, administers the guaranty fund protecting current life and annuity policies. There is also a life guaranty fund covering pre-1983 policies that still remains extant.

The P/C Security Funds

The p/c insurance security funds are accounts funded through industry assessments, with the commissioner of taxation and finance as custodian, and with the control of the funds vested with the superintendent as receiver. Because the p/c funds are essentially bank accounts and not separate entities, there are no specific reporting requirements for these funds. The superintendent is required to include as part of his annual report to the legislature under Insurance Law Section 206 “[a] statement of the expenses of administering” the funds, and to include “[t]ables relative to liquidation, conservation or rehabilitation proceedings by the department . . .” In response to these requirements, the superintendent includes a one-page schedule summarizing receipts, disbursements and balances for each of the three p/c funds. That is the sum total of the regularly provided public information about these funds!

However, because the fund accounts are within the custody of the commissioner of taxation and finance, some additional records regarding the funds can be obtained under the Freedom of Information Law. Hence, as a result of FOIL requests over a number of years to the department of taxation and finance, I have obtained detailed information on the disbursements from the three p/c funds on an estate-by-estate basis.

Curiously, however, the taxation and finance department advises that it does not keep records on recoveries from estates. For that information I was referred to the Liquidation Bureau, which, of course, takes the position that it is not a state agency and therefore not subject to FOIL. Notwithstanding this limitation, the Bureau includes some information on recoveries from estates in its annual report filed with the superintendent and which is obtainable under FOIL.

As a result, by using the information obtained from the taxation and finance department about disbursements and the limited information from the Liquidation Bureau on recoveries, I have been able to construct schedules of the net disbursements from the funds on an estate basis for the past 10 years for the p/c fund and the past 6 years for the motor vehicle and w/c funds. The schedules are too extensive to include in this article, but to give an indication of the information that has been developed, here are the five estates with the greatest net drain on each fund over these periods:

P/C Fund Net Distributions (in millions) 1998 through 2007:

Reliance Ins. Co. -- $298.2
Group Council Mutual -- $184.4
First Central Ins. Co. -- $113
Transtate Ins. Co. -- $75.5
Legion Ins. Co. -- $73
Total All Estates -- $1,066

W/C Fund Net Distributions (in millions) 2002 through 2007:

Reliance Ins. Co. -- $172.3
Legion Ins. Co. -- $76.5
Home Ins. Co. -- $34
Fremont Indemnity -- $14.6
Amer. Mutual Boston -- $12.1
Total All Estates -- $354.1

PMV Fund Net Distributions (in millions) 2002 through 2007:

NY Merchant Bakers -- $46.4
Capital Mutual -- $26.7
Reliance Ins. Co. -- $8.5
Legion Ins. Co. -- $3.3
Acceleration Nat’l -- $3.3
Total All Estates -- $89.3

The information that I have been able to glean through FOIL, although not nearly providing a complete picture of the funds, still is enough to raise questions about the management of estates and the security funds provided by the industry. Unfortunately, however, this detailed information is simply not required to be disclosed on any regular basis nor made available for public analysis.

The Life Funds

Unlike the p/c funds, there is a specific statutory authority for “examination and regulation by the superintendent” of the Life Insurance Company Guaranty Corporation, the entity that administers the principal life guaranty fund, and a requirement that the Corporation file an annual financial report and “a report of its activities during the preceding calendar year.” (§7714). Because the superintendent is required to make annual reports and examination reports on licensed companies publicly available (see §§307 and 311), access to this information about the Life Insurance Company Guaranty Corporation and the life guaranty funds it administers must be readily available as well, right? Wrong.

The superintendent does not include any information on the life funds in the annual report to the legislature, and there is no financial information included on the Life Insurance Company Guaranty Corporation web site (www.nylifega.org), which contains more disclaimers than useful information.

Because the annual financial report and examination reports are filed with the superintendent, they should be available under FOIL. However, in response to my FOIL requests, I was informed that no examinations have been conducted and the annual reports contain “confidential” information and are therefore exempt from disclosure. After an appeal, I eventually received copies of the last couple of “annual reports”, but they were so heavily redacted as to make them useless (the redacted documents reminded me of a 1950’s HUAC era spy movie!).

Ironically, there is more information available on the p/c funds – controlled by the superintendent and his agents at the Liquidation Bureau -- than is available on the industry administered life funds. The cost to the industry for funding these funds is substantial, yet there is no hue and cry demanding greater disclosure or accountability. Perhaps, therefore, there should be little surprise that the receivership process in New York is translucent at best, and that the Liquidation Bureau can claim transparency with so little disclosure.

The Liquidation Process in New York - Part IV-A: Information Highway or By-way?

The current administration has repeatedly stated its intent to be more transparent in its operation of the liquidation process in New York. The Liquidation Bureau has demonstrated this intent by issuing numerous press releases on its activity and has posted significant information and documents on its web site (www.nylb.org). Most recently it has posted the long-awaited audit of the Bureau and the estates under its management for calendar year 2006, and has sought and received significant press coverage of this event (“NY Liquidation Bureau Issues First Complete Independent Financial Audit In Its 99-Year History … Bureau Receives Unqualified ‘Clean’ Opinion from Auditor on its 2006 Financial Data” – Press release of October 29, 2008). The administration has also touted the passage of the legislation it proposed requiring the audit of the Bureau and the estates it manages in the future (“Bureau Sought Change to State Insurance Law to Provide Greater Transparency” – Press release of August 7, 2008).

But does this seeming plethora of information constitute true transparency – in the open and helpful sense? Does it provide meaningful information to interested parties in insolvent estates including policyholders, creditors, other claimants, reinsurers, guaranty funds, regulators, courts and legislators? What does the law require and are the receiver and his agents complying with those requirements? What information is required to be made available by the security funds in New York? Is information available from the security funds consistent with the statutory requirements? How helpful is the Freedom of Information Law (FOIL) to anyone seeking additional information about an insolvent estate or a security fund?

In order to present this material in manageable bites, I have divided the subject into two parts: in this Part IV-A I will cover the reporting requirements and practices of the rehabilitator and liquidator, including the Liquidation Bureau. My next installment (IV-B) will then cover the reporting requirements and practices of the security funds.

Licensed New York insurers are required by statute to file financial statements on a statutory accounting basis with the Insurance Department on or before March 1 of each year (Insurance Law §307(a)(1)). Within five months of the end of a calendar year, each licensed insurer (other than companies with minimal premium volume) are required to file audited financial statements, which statements together with the auditor’s opinion, are to be made publicly available by the Department ((§307(b)(1)). In addition to the reporting requirements, the superintendent of insurance has the power to examine the affairs of an insurer “as often as he deems it expedient,” but at least every 3 to 5 years depending on the business of the insurer (§309).

But what happens to these reporting and examination requirements when an insurer is placed into liquidation or rehabilitation in New York? Interestingly, the liquidation and rehabilitation article of the insurance law (Article 74) is silent on the subject. Under a plain reading of the law, so long as the insolvent insurer remains licensed it should continue to be subject to the statutory reporting requirements as solvent insurers. The statute does not provide for automatic withdrawal or stay of the license or licenses of insolvent insurers. Liquidators may argue that once an order of liquidation is entered, that entity ceases to be a licensed entity. This argument is not supported by the law as written and is further belied by the common practice of liquidators treating licenses as tangible assets that can be sold. Even if you accept that argument for companies in liquidation, the same argument is not applicable to companies in rehabilitation, where the specific charge of the rehabilitator is “to conduct the business thereof, and to take such steps toward the removal of the causes and conditions which have made such proceeding necessary as the court shall direct.” (§7403).

The other argument posed is that under Article 74 the courts assume responsibility for the conduct of the liquidators and rehabilitators of an estate, thus taking the place of the regulators. However, while the law requires court approval of the material actions or plans of the liquidator or rehabilitator, it does not remove the applicability of §§307 and 309, and it does not provide the court with the necessary authority or tools to perform regulatory oversight of an estate. For example, none of the statutorily required reports discussed in this article are required to be filed with the rehabilitation or liquidation court. In fact, there is no statutory requirement for the liquidator or rehabilitator of an estate to file any report on the status of an estate with the court except for a final report to close the estate. (Note: I referred in my last installment to the requirement in §7422 that the expenses of an estate are subject to the court’s approval. A review of the docket of any of the significant estates under the Liquidation Bureau’s management shows that this requirement is followed more in the breach than in the practice).

Only one of the current estates in liquidation files regular annual statements on a statutory basis (and that estate is the one estate not managed by the Liquidation Bureau). The two estates in rehabilitation have started filing statutory statements, but no estate – liquidation or rehabilitation – prepares and files with the superintendent annual audited statements within five months of the end of the calendar year (Note: the recently enacted statutory requirement for annual audited statements of the Bureau and each estate under its management has less strenuous requirements in terms of time and content and does not specifically eliminate the requirements of §307. That legislation, which is not effective until December 31, 2009, and which directly conflicts with existing law, will be addressed in a later installment of this series).

Furthermore, once an insurer is placed in rehabilitation or liquidation in New York, the insurance department ceases to continue the regular periodic §309 examinations of those entities even though the insurance law does not exempt those entities from such examination. While I have been informed that there have been instances of insurance department examination of companies in receivership in the distant past, the practice has evolved that once a company is ordered into liquidation or rehabilitation, the insurance department ceases to be the regulator of that entity – perhaps to avoid the inherent conflict of the superintendent regulating himself.

Assuming for the moment that insolvent estates are no longer subject to §§ 307 and 309 (as seems to be the unstated position of the Liquidation Bureau and the bureaus of the insurance department responsible for the regulation of licensed companies), what reports are they subject to? There are only two other reporting requirements in the Insurance law regarding estates in liquidation or rehabilitation: §§ 206 and 7405(g).

§206 requires the superintendent to include in his annual report to the Legislature “Lists of . . . insurers organized, admitted, merged, withdrawn, or placed in liquidation, conservation, or rehabilitation” (§206(a)(5); and “Tables relative to liquidation, conservation or rehabilitation proceedings by the department for prior years including the preceding calendar year” (§206(b)(3). The 247 page annual report for 2007 (obtainable in pdf format from the Department’s web site at www.ins.state.ny.us/nyins.htm) has 10 pages devoted to the receivership process: 4 pages of narrative about the Liquidation Bureau, 2½ pages listing all the estates under its management, and an income and disbursements sheet for each of the three p/c security funds. There are no statements or other financial data for any of the estates.

The other applicable section, §7405(g), requires the rehabilitator or liquidator to submit to the insurance department an annual report for each estate in rehabilitation or liquidation within 120 days of the end of the calendar or fiscal year for that estate, which report is to be prepared “upon whichever standard the corporation conducts its financial affairs” and “shall include a financial review of the assets and liabilities of the corporation, the claims accrued or paid in that period, and a summary of all other corporate activity and a narrative of the actions of the rehabilitator or liquidator respecting such corporation.” The report, therefore, need not be on a statutory basis, and need not be a full and complete financial report. Also, even though §307(a)(1) requires licensed insurers to file on a calendar year basis, the §7405(g) reports do not have to be on a calendar year basis. The last sentence of §7405(g) is also interesting. It states that the report under this section “shall be separate and apart from other reports issued by the liquidation bureau of the department in the normal course of its business.” This statement seems to further support the conclusion that the law does not excuse the liquidator or rehabilitator from the filing requirements of §307 or from examination under §309.

Even if the rehabilitator or liquidator does not file §307 statutory statements by March 1 each year, at least you can get a copy of the §7405(g) report on an estate after April 30, right? Well, yes but not from the Liquidation Bureau. You see, the Bureau is not a state agency (as confirmed by the NY Court of Appeals last year) and therefore is not subject to the Freedom of Information Law (FOIL). Unless the Bureau voluntarily provides the report, it cannot be compelled to do so under FOIL. At this time, the Bureau does not voluntarily provide the report and has not posted in on its web site. All is not lost, however. Because the report is filed with the insurance department, which is subject to FOIL, a copy can be obtained from the department. However, even if you get the report, it is not going to be terribly helpful in analyzing an estate. With the exception of the estates in rehabilitation and the one estate in liquidation mentioned above, the reports are on a “modified cash basis” rather than on a statutory basis. Furthermore, while in the past there was a separate report on each estate as required by §7405(g), the new administration has presented the report on a combined basis with financial data in columns and only a brief narrative for each estate.

Simply put -- the reporting and compliance requirements of the law for licensed insurers have not been applied to companies in receivership in New York even though there appears to be no exemption from these requirements. Information about estates in receivership -- whether in rehabilitation or liquidation -- is minimal and of limited value to interested parties. And the Liquidation Bureau, despite its repeated expressions of openness and transparency, only posts what it wants to post, and only makes available what it wants to make available -- and only in the manner and format it wants you to see.

Next time, I will explore the reporting requirements for and practices of the New York insurance security funds to see if they are any more transparent than the receivers and the Liquidation Bureau – and some of the results may be surprising.

The Liquidation Process in New York - Part III: [In]Security Funds

This seems like a particularly good time to discuss insurance security funds as part of the review of the insurance insolvency process in New York. While every state has some form of security or guaranty fund coverage for both property/casualty and life insurance products, New York does it differently – not necessarily better, but definitely differently.

Guaranty Fund Overview
The various state insurance guaranty funds generally provide coverage to resident policyholders against the failure of any carrier admitted to do business in the state. There are limitations and caps on coverage that vary from state to state. For information on any particular states coverage, go to the web sites of the National Conference of Insurance Guaranty Funds (www.ncigf.org) for information on property/casualty funds, and the National Organization of Life and Health Insurance Guaranty Associations (www.nolhga.com) for information on life and health funds. Both of these organizations make available detailed information on the coverages, caps and limitations on a state-by-state basis. The NCIGF site also has some excellent publicly available summary charts comparing coverages and limitations by state.

Even though these associations make information publicly available about the funds, the insurance guaranty funds are little known to or understood by the insurance consumer. There are many factors contributing to this lack of understanding including:

• Insurance claims are not as readily determined, for instance, as the balance in a bank account covered by Federal Deposit Insurance;
• The caps, coverages and exclusions are not uniform but vary greatly from state to state; and
• Most insidiously in this age of instant communication and “openness,” the laws of most states specifically prohibit the advertising of the existence or coverage of the insurance security and guaranty funds, particularly the life insurance funds (see my June 18, 2008 post, “Outing Life Guaranty/Security Funds”).

This series of articles, however, is about the insolvency process in New York and, of course, the insurance security funds in New York have their own quirks and distinctions from the rest of the universe.

New York has five, count ‘em, five insurance security funds -- three property/casualty funds and two life funds. The three New York p/c funds are the Property/Casualty Insurance Security Fund, the Workers’ Compensation Security Fund and the Public Motor Vehicle Liability Security Fund. The two life funds are the Life Insurance Guaranty Corporation, which was replaced (but not eliminated) by the Life Insurance Company Guaranty Corporation of New York in 1985.

The New York P/C Funds
There are two main differences between New York’s three p/c funds and the p/c funds in all other states:

1. The New York funds are pre-assessed rather than post-assessed; and
2. The New York funds are controlled directly by the superintendent of insurance as receiver rather than by separate guaranty associations.

By statute, the New York p/c funds are funded by annual assessments of all licensed carriers writing the kinds of business covered by each fund. For the largest of these funds, the Property Casualty Insurance Security Fund, all licensed p/c insurers are assessed 0.5% of “net direct written premiums” in any year where the balance in the fund falls below $150 million. According to the 2007 Annual Report of the Superintendent to the Legislature, the balance in this fund at March 31, 2007 (the latest published report) was $180,903,187. Although this balance is in excess of $150 million, it is likely that the annual calls will continue without break for the foreseeable future because of the extensive demands against the fund in recent history, including the solvency concerns with the other two p/c funds.

The other two funds are not only smaller, but they are financially stressed to the point of having required legislative intervention to support them – particularly the Public Motor Vehicle Liability Security Fund, which at March 31, 2007 had a balance of $92,760. The Workers’ Compensation Security Fund had a March 31, 2007 balance of $52,748,854, but this balance was supported by loans in excess of $17 million from assets of estates in liquidation. These loans were authorized by legislation adopted in 2005 as part of emergency measures taken by the New York Legislature to shore up the stressed funds -- measures that raise a number of unanswered questions about the long term viability of the funds and the proper or improper use of estate funds.

The 2005 legislation required the superintendent of insurance to evaluate the funds and make recommendations to the Legislature for “long term” solutions to the fund issues. This resulted in a May 2006 report by then Superintendent Howard Mills supported by an extensive evaluation by the consulting firm of RSM McGladrey, recommending a number of statutory and administrative reforms. Among the more significant recommendations were proposals to eliminate the cap on assessments; reduce the $1 million cap on claims to either $500,000 or $300,000 consistent with other state funds (NY is the only state with a cap in excess of $500,000, and most states cap claims at $300,000); excluding claims of large commercial insureds (again, consistent with the restrictions in many other states); and the merger of the Public Motor Vehicle Liability Security Fund with the more broadly funded Property/Casualty Insurance Security Fund. To date, however, I am not aware that the current administration has actively pursued these or other reform changes with the Legislature.

The pre-assessment/post assessment dichotomy between New York and other states is probably not terribly significant today. While it might have been argued in the past that pre-assessments allow greater flexibility in addressing insolvencies on a timely basis, the mere volume of insolvencies and the resulting claims, and the financial stress on the funds, has de facto made even the New York funds close to being post-assessment funds.

The second significant difference between the p/c funds in New York and those of other states is that in the rest of the country, each state’s fund is managed by a separate entity – generally a guaranty association that is independent of the receiver and that include industry representation (the funds are, after all, the funds of the contributing insurers!). In New York, however, there is no separate entity managing or overseeing the funds. The New York p/c funds are nothing more than general accounts accessed by the sole authority of the superintendent of insurance. There is no industry representation, no separate claim handling function and no separate oversight.

The existence of guaranty associations provides an excellent check and balance in the insurance insolvency system. Receivers benefit from the expertise of the associations and their members in the management and payment of claims, and the associations provide an opportunity for the industry to have a better understanding of potential fund requirements and the unique issues facing particular insolvent estates.

In New York, however, the industry has limited if any involvement in the management or review of claims of an estate, and very little input to estate specific issues that may arise except in the context of costly and time consuming adversarial proceedings.

Finally, and of most significance, the absence of separate p/c guaranty associations in New York results in even more authority over the control and management of insolvent estates residing with the Liquidation Bureau as the superintendent’s agent – a Bureau that, as I have previously pointed out in earlier installments in this series, is not a state agency (it just acts like one), has no clear statutory foundation, is subject to no central regulatory or judicial oversight, and despite its claims of transparency, is not obligated to provide any significant information on its operations to any regulatory, judicial, consumer or industry body. In effect, the New York p/c funds are pools of funds collected from the industry with unfettered check writing authority granted to the superintendent’s agents – the Liquidation Bureau -- who are accountable to no one!

The New York Life Funds
The principal life insurance guaranty fund in New York is the Life Insurance Company Guaranty Corporation of New York, which was created by special legislation in 1985. The creation of the Life Insurance Company Guaranty Corporation of New York in 1985, however, did not terminate the Life Insurance Company Guaranty Corporation, which continues to cover claims on policies issued before August 1985 that are not covered by the “new” fund.

The life fund in New York bears a much closer resemblance to the funds in other states. Assessments from the industry are made only on an “as needed” basis so there is no pre-funding involved. Also, unlike the New York p/c funds, the New York life fund is actually managed by a separate not-for-profit corporation whose members are all New York licensed life insurers. The members in turn select the directors of the corporation who are charged with its management.

The pre-1985 fund remains relevant because the “new” fund has limitations and coverage distinctions quite different from the pre-1985 fund. Most significantly, the “new” fund has a $500,000 cap on claims, and covers only New York resident policyholders of licensed companies, while the pre-1985 fund covers claims under any policy issued by a domestic life insurer. These distinctions are likely to play a significant role in addressing the Liquidation Bureau’s work-out plan for Executive Life Insurance Company of New York in Rehabilitation, whose remaining book of business consists primarily of single premium deferred annuities issued before and after August 1985.

Although the New York life funds are closer to the traditional separate entities found in most other states, they seem to fly under the radar to a greater extent than the New York p/c funds. For example, information on the p/c funds is included each year in the Superintendent’s annual report to the Legislature, but there is no information included regarding the life funds. This is the case even though Article 77 of the insurance law covering the new fund requires an annual report be filed with the Superintendent.

The New York insolvency process is fraught with inconsistent and ineffective reporting requirements. Explaining these requirements and how they affect the effectiveness of the process will be the topic of Part IV of this series.

The Liquidation Process in New York – Part II: The Right Stuff

On July 7, 1994 a consensual order of rehabilitation was entered against United Community Insurance Company (UCIC) in Upstate New York. Less than a month later, on August 3, 1994, the then superintendent of insurance, Sal Curiale, filed a petition to liquidate UCIC with the New York Supreme Court in Schenectady. The management of UCIC, having just consented to rehabilitation, vehemently opposed the petition and the issue of the actual financial condition of the company became the subject of an evidentiary hearing and the hiring by the court of an independent actuary. In the meantime, the New York Liquidation Bureau was effectively dismantling the company under the rehabilitation order.

When the new superintendent, Ed Muhl, reviewed the stalemate in early 1995, he made an extraordinary decision: he appointed a special agent from outside of the Liquidation Bureau to assess the financial status of UCIC and to handle the rehabilitation or liquidation of UCIC, whichever was warranted. The special agent put together a small team of experts and a plan of action and advised the court of those plans. The special agent determined to the satisfaction of the court that the company was insolvent and an order of liquidation was entered on November 9, 1995 -- more than 14 months after the petition had been filed – and this time with the consent of UCIC’s owner and board of directors.

The management of the UCIC estate by the special agent and his team since 1995 has been an example of how efficiently and transparently an estate can be managed for the benefit of policyholders and creditors in New York under the existing statutory scheme. This was accomplished by the special agent working closely with the various state guaranty funds, creditors and reinsurers, by staffing commensurate with the actual needs and activity of the estate, and by being accountable to the liquidation court through regular conferences and reports. UCIC is the only company in liquidation in New York that has consistently filed with the liquidation court annual statements prepared on a statutory accounting basis. While dividend declarations by estates in liquidation in New York are rare, UCIC has paid dividends over the years totaling 35% of recorded liabilities. Information on the estate is regularly provided by the special agent to the liquidation court and all interested parties, including representatives of the principal creditors, reinsurers and guaranty funds.

The Liquidation Bureau, however, has done its best over the years to downplay the record of UCIC and bring the estate into the fold of the Bureau. For instance, if you look up UCIC on the Bureau’s website you will find no reference to the special agent (the contact person listed is an employee of the Bureau and not the special agent), an indication that no dividends have been paid, and no reference to any filed documents other than the order of liquidation. If it were not for the level of involvement by the liquidation court, creditors, and guaranty funds fostered by the special agent over the years, this estate would have years ago become just one more mishandled estate in the Bureau’s quiver.

What was extraordinary about Superintendent Muhl’s decision to use a special agent outside of the Liquidation Bureau was not that it was outside of the statutory scheme – quite the opposite. The UCIC case is extraordinary because it is squarely within the statutory scheme, and it is the only estate that actually follows the original concept of the statute. (For a discussion of the statutory scheme and its history, see Part I of this series, posted on August 19, 2008). It is the only estate that works closely with the court, files regular reports, prepares its annual statements on a statutory basis, and gets all its expenses and actions approved with full disclosure to all interested parties. This feat could not have been accomplished, however, without the foresight of Superintendent Muhl to understand the scope of his authority as receiver, and the pro-active participation of the court.

The original statutory scheme recognizes that each estate is different and allows the superintendent to bring the appropriate expertise to bear on each individual circumstance. Unfortunately, the Liquidation Bureau by its very nature (a fixed staff of 500 people, most of who are protected by a union contract) is a one-size-fits-all operation with a voracious appetite but little flexibility. The result is a statutory process that has been high-jacked by a non-statutory entity accountable to no one.

It will take more than adding layers of reports and audits to this already cumbersome operation to provide efficient and transparent management of insolvent estates. It will take a return to the actual intent and structure of the statutory scheme!

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Postscript: The legislation sought by the Liquidation Bureau as a “reform” action, requiring the annual audit of the Bureau and the estates under its management, was signed into law as Chapter 540 on September 4, 2008. A future installment in this series on the liquidation process in New York will address this law and why it will move the Bureau even further from proper oversight, and make the administration of insolvent estates even more costly and inefficient. The next installment in this series, however, will cover the State’s statutory insurance [in] security funds.

The Receivership Process in New York – Part I: What exactly is the Liquidation Bureau anyway?

As promised in my last post, here is the first in a series of articles on the receivership process in New York: starting with a discussion of the liquidation bureau – what exactly is it?

It is easier to state what the liquidation bureau is not. According to the New York Court of Appeals, it is not a state agency (and therefore not subject to audit by the state comptroller). According to the records of the Secretary of State, it is not a corporation. And according to the Insurance Law . . . , well let’s just say its status is undefined.

As I stated in my last posting, before 1993 there were no statutory references to a liquidation bureau in the Insurance Law including the receivership article, Article 74. In 1993, subsection (g) was added to Section 7405 (Order of liquidation; rights and liabilities) requiring the superintendent as receiver to prepare an annual report on the status of each company in liquidation or rehabilitation. The last sentence of this new section states that "This report shall be separate and apart from other reports issued by the liquidation bureau of the department in the normal course of its business." This is the only reference in the Insurance Law (actually the only reference in the entire New York Consolidated Laws) to a liquidation bureau.

The Bureau's existence may be assumed, but its status and mandate are not defined anywhere in the law. The home page of the Liquidation Bureau’s web site states:

The New York Liquidation Bureau (NYLB) is a unique entity. [No debate there!] Receiving no funding from taxpayers, it carries out the responsibilities of the Superintendent of Insurance as Receiver, and acts on his behalf in the discharging of his statutorily defined duties to protect the interests of the policyholders and creditors of insurance companies that have been declared impaired or insolvent.

The bureau's web site also states that it has “performed this function since 1909, when the New York State Legislature passed the law mandating that the Superintendent assume the separate responsibility of Receiver.” However, the law does not establish a bureau to carry out this function. The law requires that the superintendent be designated as rehabilitator or liquidator to take control of the assets of an insolvent company and liquidate or manage the estate. It also permits the appointment of deputies and assistants to support the superintendent in this role as receiver. It was clearly anticipated that these appointments would come from the key employees of the insolvent company itself -- those with the greatest knowledge of the business and operations of the company being liquidated -- and would be engaged only for the duration of the receivership process.

The hiring of employees of the insolvent company, and the temporary nature of these appointments, was succinctly summarized in a 1915 report to the New York State Constitutional Convention Commission on the Organization and Functions of the Government of the State of New York (at page 118) -- just a few years after the statute referred to in the Bureau's web site:

The practice is to retain such of the employees of each company which comes into liquidation as may be necessary to attend to the details of its affairs, and to dispense with them as rapidly as consistent with the proper conduct of its business.

The current statute is consistent with this historical record of the temporary nature of the receivership of insurance companies. Rather than authorizing the establishment of a permanent bureau, current Section 7422 authorizes the superintendent to appoint deputies and others to assist in the performance of the receivership function, "and all expenses of conducting any proceeding under this article shall be fixed by the superintendent, subject to the approval of the court, and shall be paid out of the funds or assets of such insurer."

Article 74 clearly views each insolvency as a separate proceeding with the superintendent acting as receiver under the supervision and control of a Supreme Court judge for that estate. Nowhere in the law is there any provision for the establishment of a permanent agency or bureau to carry out this function, and there is no central judicial oversight designated to coordinate the handling of all pending receivership proceedings collectively.

The limited role and temporary nature of the agents assisting the receiver for a particular estate has evolved into a permanent liquidation bureau, particularly over the past thirty years. This evolution occurred without a statutory, judicial or regulatory mandate to do so. As the number and size of insolvencies increased dramatically in the late 1970s and into the 1980s, the liquidation bureau grew into its own self-operating permanent bureaucracy, flying under the radar and accountable to no one – not the legislature, not the courts, and not the regulators.

The Bureau today has half as many employees (over 450 employees) as the entire New York Insurance Department, and most of them are protected by union contracts. The Bureau also purports to have a budget of over $100 million, but this "budget" is not subject to any independent oversight. Although Section 7422 requires court approval of expenses for an estate, there is no requirement in the law – including the much touted new legislation that would require annual audits – that the supervising court be provided with any regular, interim financial or status report. More significantly, no one court would be looking at the bureau or its budget as a whole.

The current administration has made a lot of noise about reforming the bureau and making it more “transparent.” It is doing this, however, by making the bureau even more permanent contrary to the mandate of Article 74 and the statutory receivership scheme.

In my next posting in this series I will discuss a current example of how the system could and should work under the existing statutory authority. In subsequent postings I will also discuss the role and structure of the security funds and how they have helped perpetuate the liquidation bureau’s independence and freedom from oversight, and why the current administration’s reform efforts will not only fail to achieve the advertised accountability and transparency, but will in fact further fortify the bureau against substantive change while significantly increasing the cost to policyholders and creditors of insolvent companies.

OPPORTUNITY LOST?

I have been asked why, as someone who has been urging reform of the insurance receivership process in New York seemingly forever, I have been so critical of the active efforts of the current administration to make the process “more transparent and accountable.” The answer is simple: the changes fail to do either.

There are few political opportunities to make meaningful systemic changes, and the current administration – touting its youthful, smart, crusading mantra – seemed poised to do something extraordinary. However, rather than addressing the process itself, the administration has simply repackaged the existing archaic, inefficient and unaccountable institution and wrapped it in the banner of reform.

The basic criticisms of the insurance receivership process have been well documented. Two of the more thorough scholarly analyses were the May 2000 Final Report of the Tort and Insurance Practice Section Task Force on Insurance Insolvency entitled “Receivership of Insolvent Insurance Companies”; and the November 2002 study by the Center for Risk Management and Insurance Research at Georgia State University entitled “Managing the Cost of Property-Casualty Insurer Insolvencies in the U.S.” The Georgia State University Report succinctly summarized the criticisms of the process as follows:

Our examination reveals several aspects of the U.S. insurer receivership system that contribute to higher insolvency costs. Fundamentally, there are incentive conflicts between regulators, receivers and other stakeholders that the system fails to control. Receivers have incentives to prolong receiverships and inflate costs (to increase their compensation) as these costs are passed on to parties that have little ability to influence the receivers’ performance. There is little transparency and accountability, and regulators and the courts do not exercise adequate oversight of receivers and receiverships.

In the time since these articles were published, a number of states have dramatically improved their handling of insolvent estates. New York has not. The dearth of action in New York may help explain why there is a willingness to accept any change as an improvement rather than considering meaningful systemic improvements.

Over the next couple of months I intend to post a series of articles reviewing the problems with the receivership process in New York, and discuss why the activity of the current administration will not only fail to provide more openness and accountability, but will make actual reform less likely in the future.

The first article will be a review of that enigmatic institution – the New York Liquidation Bureau: what it is and what it is not. To prepare for this discussion a little quiz: how many references are there to a liquidation bureau in the entire Consolidated Laws of New York? Answer: before 1993 – none. Currently – one. If you want to know the context of this one reference or the significance of the dearth of references in the law, tune in next time!

TRANSPARENT TO WHOM?

Aside from the scientific definitions, there are two principal meanings of “transparent” –

• Open as in frank or candid; or
• Easily seen through.

Quite often in political double speak the term is intended to convey the first meaning, while in reality the only transparency is in the motive.

I offer as a case study the recent legislation passed by the New York Legislature shortly before the end of session that would require the audit of the Liquidation Bureau and of each of the estates in liquidation or rehabilitation (the Bill, S6535-A, was passed by both the Senate and Assembly, but as of this date had not yet been sent to the Governor for signature). The Sponsors Memo accompanying the legislation claiming that the legislation will “shed sunlight on the financial health” of the estates in receivership and on the Bureau itself. Although the Bureau and the estates under its control desperately need proper oversight and examination, this legislation provides neither.

There are three principal defects in the legislation. First, it does not provide for a consistent, industry recognized standard of review; rather it allows for the examinations to be “upon whichever standard each corporation conducts its respective financial affairs.” Those of us that have dealt over the years with insolvent estates know that this will simply mean the continuation of the use of separate, inconsistent, confusing and sometimes unrecognizable financial reporting standards that are of little or no value to significant financial analysis.

Second, the reports do not have to be filed until August of the year after the year being examined, which effectively renders the reports out of date by the time they are issued (licensed companies, as most know, have to file their statutory statements by March 1 each year, and their audited statements by June 1).

The third significant issue is the cost. The “Fiscal Implications” section of the Sponsors Memo states that “[i]t is estimated that [the cost of the financial statements and opinions] will be below $300,000 annually.” That is for the audit of roughly 25 separate companies plus the Bureau itself for an absurd average of less that $12,000 per audit. In fact, last fall the Bureau engaged audits of the estates under its control at an estimated cost, without any unforeseen complications, of between $1.0 and $1.1 million – almost four times the amount in the Sponsors Memo. Furthermore, given that these audits were to have been completed by year-end 2007, the fact that they still have not been completed seven months later would suggest that “unexpected circumstances” have been encountered, and the fees will be even greater than the estimates.

What is the significance of this gross understatement of the fiscal implications? Simply this: These fees are paid from the assets of the various estates, which already are financially insolvent with insufficient funds to meet their policy obligations. While appropriate audits of the Liquidation Bureau and the estates it manages are warranted, these audits should provide value to the oversight of the Bureau and the estates. By not requiring a consistent, recognized reporting standard on a timely basis, the legislation does not provide that value and is a waste of estate assets.

The Sponsors Memo states that the legislation was “developed by the Liquidation Bureau, in consultation with the Legislature.” If a licensed insurer came to the Legislature with a request to require it to prepare and file additional reports, I am sure that the request would be viewed with great skepticism. The Legislature should have viewed the transparent motive behind the Bureau’s request in the same light.

With the legislation as passed, the Bureau can now claim that it has met the call for greater transparency, while in fact that transparency -- as in open, frank or candid -- is illusory and obtained at the cost of the estates, their policyholders, creditors, reinsurers and investors.

OUTING LIFE GUARANTY/SECURITY FUNDS

The Federal Deposit Insurance Corporation (we all know the FDIC) ran full page adds in national papers earlier this week with a picture of a $100,000 gold certificate and a penny. Their pitch -- “Insuring deposits up to $100,000 without anyone losing a penny.” The protection provided by the FDIC is well known and publicized, and regularly used in financial planning, even by people of relatively modest means. Most of us know that it often makes sense to spread funds among various accounts rather than exceed the $100,000 limit to make sure there is maximum insurance coverage in the event of the failure of a financial institution. This insurance has proven to provide confidence in our financial institutions, even when there is a threat of financial strains. How different is the life insurance world!

In the life insurance world the existence of life guaranty or security funds is generally not publicly known. In fact, publicizing the existence of these funds by companies and agents is statutorily taboo! Even where information on these funds may be available, the burden is on the consumer to initiate the inquiries, and once located the information is complex and confusing with different limits and coverages state by state. Many, many decades ago, in a less controlled and less sophisticated financial environment, it was believed that allowing brokers or companies to mention the existence of guaranty funds would lead to the sale of cheap or non-existent life policies without concern for the financial stability (or existence) of the companies, hence leading to increases in fraudulent policies or life company failures. The time has come, however, to bring the life guaranty and security funds out from the closet into the light of day, and to have these funds be as much a part of financial and estate planning involving life insurance and annuities as the FDIC is for financial accounts.

To illustrate: Given the accumulation of wealth by baby boomers coupled with increases in longevity, more and more people are considering the purchase of annuities to insure that they do not outlive their means. Without knowing about the limitations of the life guaranty funds in your state (and with your broker or agent prohibited from telling you!), you might not even consider purchasing annuities from more than one carrier to maximize guaranty/security fund coverage. In New York, for instance, the limit of the life security fund for contracts issued after August 2, 1985 is $500,000 (there is no limit on contracts issued before August 2, 1985). Shouldn't you know this before you place your life savings into the purchase of an annuity? Shouldn't your broker be able – no, required – to give you this information? Shouldn't information about life security be as widely available as information on Federal Deposit Insurance?

Who are we protecting by keeping this information in the closet?

FOOTNOTE ON THE SUPERINTENDENT'S REPORTS

In response to yesterday’s entry on the two statutorily required reports of the New York Superintendent of Insurance, I was asked how many of the 961 Insurance Department employees work for the Liquidation Bureau. The answer is none, nada, nil, zero. The Liquidation Bureau is not a state agency and its employees are not state employees (See Dinallo v. DiNapoli, NY Court of Appeals, No. 111, October 11, 2007, discussed in my October 12, 2007 web entry).

The Superintendent’s report as receiver does not include any information on the Liquidation Bureau’s staffing or budget. The “consolidated” statements contain some information on salaries and expenses relating to estates in liquidation, but this information does not include all estates, and there is no presentation on the Bureau itself. The Superintendent’s Annual Report to the Legislature, at page 237, states that the Liquidation Bureau has “a staff of 450 and a budget of $100 million.” There is no further information, however, on the details of this staffing or the expenses.

TWO REPORTS OF NOTE

Two annual reports of the Superintendent of Insurance required by New York’s insurance law have been issued in the last few weeks: one of which is readily available and the other that is available only through a request under the Freedom of Information Law.

The readily available report is the 2007 Annual Report of the Superintendent of Insurance to the New York Legislature required by Section 206 of the Insurance Law. This 268 page report, which is available as a pdf document through the Department’s website (http://ins.state.ny.us/), is cram full of information about the insurance business in New York and the regulation of the business. For instance, the report contains consolidated summaries of the statements filed by insurers showing such things as the number and kinds of authorized insurers by class of business, total assets, liabilities, premiums written and insurance in force. On the regulatory side, the report includes summaries of new regulations and circular letters, lists of reports of examinations completed, and lists of insurers organized, admitted, merged withdrawn, or placed in liquidation, rehabilitation or conservation.

If you dig statistics, as I do, you may find some of the data on the Department itself to be most fascinating. For instance, did you know that for the calendar year 2007 the Insurance Department:

Employed 961 people of whom 647 were located in New York City, 289 in Albany and 25 elsewhere?

Employed more attorneys (69) than actuaries (61) or investigators (43)?

Issued 153,909 licenses during 2007 to adjusters, agents, brokers, consultants, reinsurance intermediaries and service contract registrants?

Collected receipts totaling $742,245,640.94 and incurred Department expenses of $188,250,888.74?

Much of this information is required by the laundry list set forth in Section 206, although the report has evolved over the years into a very comprehensive annual almanac. If you are interested in researching the business of insurance in New York or in the minutia of the activities of the New York Insurance Department, this report is a great place to start.

The second report of note is the 2007 Annual Report of the Superintendent of Insurance as Liquidator or Rehabilitator required by Section 7405(g). This report is required to include a financial review of the assets and liabilities, and the claims paid or approved for each domestic insurer in liquidation or rehabilitation, and a summary of all other corporate activity and a narrative of the actions of the liquidator or rehabilitator for each company. (This statutorily dictated report should not be confused with the “2007 Year-End Report” posted by the New York Liquidation Bureau on its web site back in January, which basically rehashes all of the Bureau’s 2007 press releases).

The report required by Section 7405(g) – while not nearly as comprehensive as reports required by solvent companies -- is the only meaningful information required to be compiled by the Superintendent of Insurance about the companies for which he acts as receiver. Yet this report cannot be found on the web site of either the Insurance Department or the Liquidation Bureau, and can only be obtained by making a Freedom of Information Law (FOIL) request to the Insurance Department.

The justification for this restrictive availability, I have been told, is that the information contained in the report is unaudited. However, even though the Liquidation Bureau has announced that it is having audits of each estate performed (a process that has been ongoing almost as long as the period being audited), there is no requirement in the law for audited statements of companies in liquidation or rehabilitation. The Section 7405(g) report is the only statutorily required statement of the receiver, and limiting its accessibility does not appear to be within the intent and purpose of the statute.

Furthermore, despite the Bureau’s repeated published statements about being more transparent, the Report actually appears to be a step backwards from prior administrations. For some reason the current administration decided to present the data on the individual companies in liquidation (with one exception) on a consolidated basis rather than by separate statements. While this approach may show the totality of the Bureau's realm, it is not consistent with the statutory requirements or the reality of the process where each estate is a separate and distinct entity.

The report can be obtained by making a FOIL request of the New York Insurance Department. You can get it without cost using the Department’s online FOIL request form indicating you want it sent via e-mail. Hard copy costs 25¢ per page. Do not direct a request to the Liquidation Bureau – it will deny the request on the basis that it is not a state agency subject to FOIL. Once again, so much for transparency!

What does it mean to Stand in the Shoes of an Insolvent Insurance Company?

The courts in most jurisdictions – including New York -- have consistently held that a receiver “stands in the shoes” of the insolvent company and does not get to change the contractual or legal obligations of the insolvent company simply because an order of rehabilitation or liquidation has been issue. It is not clear, however, if the current management of the New York Liquidation Bureau accepts that they are private managers of insurance entities and are not imbued with the super powers of a governmental agency. The courts continue to do their part to remind the Bureau of its role, but judging from the number of times they need to do so, it does not seem that the message is getting through.

Last October the New York Court of Appeals confirmed that the Bureau was not a state agency (Dinallo v. DiNapoli, October 11, 2007, Decision 111). Although this was a position espoused by the Bureau itself, the Bureau’s motive was not to restrict its powers but to avoid scrutiny by the state comptroller (See my web entry for October 12, 2007). In finding that the Bureau was not a state agency, the Court also restated the broadly accepted principle that the receiver “for all practical purposes takes the place of the insolvent insurer.” (Decision at p.3). It is this limiting role that the Bureau seems to have a problem accepting.

Granted, the receiver has certain necessary powers to assist in the marshalling of estate assets and court protection from unwarranted assaults, but these powers are not intended to alter contractual relationships or create obligations that did not exist pre-receivership. For instance, in Matter of Midland Ins. Co., 79 NY2d 253, 265 (1992), the New York Court of Appeals stated that “liquidation cannot place the liquidator in a better position than the insolvent company he takes over, authorizing him to demand that which the company would not have been entitled to prior to liquidation. . . . Those rights were not altered merely because a liquidation order was entered.” Notwithstanding this clear pronouncement, the Bureau frequently attempts – even in the Midland Insurance Company estate -- to alter contractual rights of others under the guise of acting as a “fiduciary” or under some implied or threatened super authority.

In January 2008 the Midland liquidation court (Justice Stallman) issued a lengthy decision that, while supporting the primary claim handling authority of the liquidator, also took the Bureau to task for not adequately protecting the interposition rights of reinsurers, and requiring the Bureau to revise the claims protocol in this regard (See my February 21, 2008 web entry on this decision). Now Justice Stallman has again reminded the Bureau of the limitations of its authority and power to define the rights of others – this time regarding the Bureau’s attempt to apply New York law across the board to all Midland creditors.

In a recent 24-page decision (In the Matter of the Liquidation of Midland Insurance Company, Motion Seq. No. 69, April 15, 2008), Justice Stallman has directed that the law applicable to each policy is not New York law in all cases; rather the applicable law is to be determined following the ‘grouping of contacts’ approach of the Restatement (Second) of Conflicts of Laws. The decision rejects the Bureau’s interpretation of the Appellate Division finding in the Lac d’Amiante du Quebec claim in Midland (269 AD2d 50 [1st Dept 2000]) that all creditors are to be treated equally requires that New York law must apply to all Midland contracts. Instead the Court turns to the Foster Wheeler Corp. holding (36AD3d 17 [1st Dept 2006]) that the “grouping of contacts” principle of the Restatement (Second) of Conflicts of Law applies in New York and is consistent with the principles of the Uniform Insurers Liquidation Act (Insurance law Section 7048 et seq.) for the equitable administration of estates. Furthermore, the court found that the establishment of nine statutory classes of claimants in the 1999 amendment to the priority of distribution scheme under Article 74 eliminates any basis for applying the equal treatment reading of the Lac d’Amiante decision.

The decision is an interesting read, but the bottom line is that the court rejected equating equal treatment with equitable treatment, and again confirmed that “standing in the shoes” does not mean trampling the contractual rights of others.

Insurance Exchange Update

Because of the recent interest in reviving the insurance exchange in New York, and the numerous requests I have received for materials on the old New York Insurance Exchange, I have posted a new section of articles, studies and publications relating to the old Exchange to my website. these materials can be accessed at www.pbnylaw.com/publications.html.

One of the articles at this site is my 2004 article presented at a Practicing Law Institute seminar on run-offs and commutations, "What Ever happened to the New York Insurance Exchange (and why do we care?)." In that article I stated that the Exchange's Security Fund's plan for the distribution of about $81.8 million against obligations of $112.5 million had been approved by the Court in February 2004, but that no distribution had been made under the plan as of the date of the article in November 2004. Several people have asked whether a distrbution was ever made. the answer is yes, but it required some pressure to accomplish.

In December 2004, I brought a further motion before the Court to force the Security Fund to comply with its own plan and distribute the funds available for distribution immediately. As a result of this motion, in early January 2005 the Security Fund made a distribution of $81.6 million, or 72.05% of approved claims. this was followed in June 2005 with a second and final distribution of an additional $4.1 million, or 5.29%, to the same claimants. Following these distributions, which constituted substantially all of the assets of the Security Fund less administrative and closing expenses and reserves, the Security Fund filed a final report with the Court. the Court approved the final report and discharged the Security Fund from any further obligations to claimants in May 2006.

Judicial Authority in Liquidation Proceedings

Like an old prospector, it is always a thrill to find a small but valuable nugget in a large pile of rocks. In this case, the large pile of rocks is the 27 page decision of New York Supreme Court Justice Michael D. Stallman in a January 14, 2008 decision In the Matter of the Liquidation of Midland Insurance Company (printed in the New York Law Journal on February 14, 2008).

The case centered around motions by a reinsurer of Midland, Everest Reinsurance Company, seeking to lift the standard injunction barring suits against the Liquidator alleging that “the procedures of the New York Liquidation Bureau in handling, determining, and settling insurance claims violates provisions of the reinsurance contracts between Midland and Everest.” (Decision at p.1) The provisions Everest alleged were violated by the Liquidator’s agents included “(1) notice of a claim to Everest; (2) an opportunity to associate with Midland and to cooperate in the defense and control of any claim which may involve Everest’s reinsurance; (3) access to Midland’s books and records; (4) a right to investigate; and (5) a right to interpose defenses in the Midland liquidation (interposition rights).” (Decision at p.11)

Most of this very thorough decision was consumed by a point by point rejection of each of Everest’s claims, either because Everest failed to show any substantive evidence of error by the Liquidator’s agents, the remedy for any shortcomings existed within the framework of the existing liquidation process, or the issue had not risen to the point of a breach. The decision also strongly supported the Liquidator’s “clear, exclusive fiduciary powers over handling claims” (Decision at p. 20) and the exclusivity of the liquidation court in denying Everest’s motion for leave to sue. It seemed like a substantial sweep for the Liquidator and a complete loss for Everest. Then came the nugget!

Although the Court strongly supported the Liquidator’s control over the handling of claims, it did not dismiss the interposition rights of reinsurers. In seeking a balance between the control of the claim process by the Liquidator and the exercise of the interposition rights of reinsurers, the Court stated: “Thus, the only logical approach is to permit Everest and other reinsurers to exercise their contractual interposition rights after the Liquidator has allowed a claim, but prior to the Court’s approval of a claim.” (Decision at p. 22). The problem was that there was an earlier Court order on claims allowance procedures for Court approval that, in Justice Stallman’s view, conflicted with the reinsurers’ interposition rights.

“To give effect to the contractual interposition rights of Everest (and of other similarly situated reinsurers), this Court is constrained to modify the procedures for judicial approval of allowed claims, to permit reinsurers to assert defenses available to Midland or to the Liquidator to any claim allowed by the Liquidator which is either partially or wholly reinsured, and to establish a process in which those defenses can be adjudicated as part of the judicial approval process, involving a hearing before a referee equivalent to that provided where an objection is filed to the Liquidator’s disallowance of a claim. Otherwise, the Liquidator is placed in a position where compliance with [the prior] order could result in a violation of Midland’s reinsurance
contracts, jeopardizing reinsurance recovery.” (Decision at p. 24)

Therefore Justice Stallman, on his own volition, ordered a revision of the prior claim allowance procedures invoking his broad supervisory powers under the liquidation Article of the New York Insurance law!

“Thus, pursuant to its supervisory powers under Insurance Law § 7419(b), the Court directs the Liquidator to review the claims allowance procedures and to formulate changes to the claims allowance procedures and protocols of the Liquidation Bureau. The Liquidator shall report to the Court within 120 days with proposed changes.” (Decision at p. 24)

After more than twenty years of involvement in insurance receivership proceedings in New York, I can confirm the rarity indeed for a liquidation court to actually exercise its supervisory powers on its own volition. Others can dissect the holdings of the decision on the motions by Everest, the authority of the Liquidator, the rights of the reinsurers and policyholders; and others can speculate on the prospects for appeals by the Liquidator or Everest. I will enjoy the moment of a judge actually taking the time to consider the process beyond the four corners of the motions before him to exercise his authority for the benefit of the process as a whole.

(If you cannot find a copy of Justice Stallman's decision and would like one, e-mail me at pbickford@pbnylaw.com)

HAS THE TIME COME FOR A NEW INSURANCE EXCHANGE?

For almost a year now, the New York Superintendent of Insurance, Eric Dinallo, has been stating publicly that he is considering re-opening the old New York Insurance Exchange. He points out that the statute (NY Insurance Law Article 62) is still on the books, and perhaps an exchange facility could be used to address areas of coverage that lack adequate capacity. Does such a resurrection make any sense?

For those of you too young to remember, the New York Insurance Exchange was opened in 1980 as a Lloyd’s type marketplace with business submitted to member syndicates through member brokers. It was publicly touted as the US answer to Lloyd’s and, after a slow start, blossomed over the next several years, with over $300 million in GWP in 1983. By the end of 1984 the Exchange was the eighth largest US reinsurer by premium volume and fifth largest in surplus. By November 1987, however, the Exchange was closed and all its syndicates either in run-off or liquidation. For more information on the brief mercurial life and rapid demise of the Exchange, see my 2004 article “What Ever Happened to the New York Insurance Exchange (And Why Do We Care)?”
(www.pbnylaw.com/articles/newyorkinsuranceexchangearticle11-04.pdf)

The question is, if the Exchange was such a failure in the 1980s, why consider re-opening an exchange today? My short answer is another question: Is Lloyd’s still a relevant market today? Given the renewed vibrancy of Lloyd’s over the past decade after its own financial tribulations (see Equitas), a Lloyd’s type facility not only can work, it can thrive. The financial woes of the New York Exchange and Lloyd’s bore many similarities, but the major difference was that Lloyd’s had three centuries of developed institutional and market support and New York did not. Done right, however, an exchange should be able to thrive in the US as well. The keys, of course, are defining and following through with "doing it right."

To assist in this consideration, I offer a few principles that, in my view, should form the basis of any proposal to go forward:

• The concept should be industry rather than regulator driven. The regulators can provide the forum and support for the development of a plan, but the primary force needs to come from inside the insurance and financial services industries if there is to be any lasting success.
  
• The capital requirements for syndicates will need to be significantly greater (by many multiples) than the requirements of the old exchange.
  
• There will need to be a strong commitment on the part of both the regulators and the industry to self-regulation and control of the market: with the regulators allowing the facility to develop rules controlling the operation and security of the market; and with the industry having the will to enforce its rules and its financial security requirements – a major failing of the old exchange.
  
• And a new exchange will need to take full advantage of the technical developments over the decades since the original exchange, including instant communications, virtual trading capabilities and real time access to and use of transactional and other data.

There are many other issues that will need to be addressed by any group studying the possible resurrection of an insurance exchange, not the least of which are the types or lines of business to be allowed on a new exchange and the tax and regulatory considerations that force most new insurance capital off shore. But all of those issues can be considered within the framework of the foregoing principles.

Superintendent Dinallo appears to be taking a studied view and careful approach to the exchange resurrection prospects. It will be interesting to see if his interest can translate into real consideration. I, for one, hope so.

(For the record, I was the Vice President, Secretary and General Counsel of the New York Insurance Exchange from its opening in 1980 through 1985. I am also the author of Exchange: A Guide to an Alternative Insurance Market, NILS Publishing Co., 1987.)