The shadow of 9/11

Jeremy Golden pays a visit to the New York State Insurance Department and learns from superintendent Howard Mills that TRIA is still top of the agenda, and that Spitzer may have overstepped the mark

Interviewing superintendent, Howard Mills, in October this year, it is clear that terrorism insurance is still top of the agenda with the Terrorism Risk Insurance Act (TRIA) scheduled to end on 31 December 2005, and as yet no extension agreed upon. In a relaxed, yet ebullient style, Mr Mills outlined his position, as follows.

"The number-one challenge is to do all we can to ensure that there is a federal safety net for terrorism cover.

"I am not one of those who is simply saying, 'extend TRIA as it currently exists' - I prefer to see us move toward a European model, such as the pooling systems in the UK and Germany, for example, which is what I view as an ideal long-term solution. This could include heavy federal involvement initially, but de-escalation as the capacity is built from the private sector.

"I don't really know if congress, given what they have on their agenda - the distractions of hurricanes Katrina and Rita - is going to have time to get that type of long-term solution in place by the end of the year.

So the critical point is that there cannot be a gap. Therefore, I am hopeful that they will extend TRIA with modifications.

"I am also involved in developing a national policy to deal with natural catastrophes. I favour a federal solution, which is critical to build capacity. So, terrorism and natural catastrophe, and how to deal with that and build capacity, is critical.

"Other priorities I have in mind are to make reforms here in the department, especially with the ongoing investigations and indictments for bid-rigging and price-fixing in the insurance industry by the New York Attorney General.

I want to see our department restructured so that it is better equipped to maintain its proper role as a primary regulator, which, you could argue, got away from us in the year prior to my arrival here.

"But we have other high priorities. We have had a lot of success on the auto side, combatting fraud. We want to put in place legislation that would make fraud a proper felony, with a proper deterrent in place, which we don't currently have.

"Another major concern is the health-insurance issue, which is very politically sensitive. We need to get into a situation where we can control costs and hold the rates down - get back to getting prior approval on rates.

"We have a whole range of issues we are dealing with across the property, health and casualty spectrum," Mr Mills concluded.

Superintendent Mills: the man, the role and his perspective

Howard Mills was officially confirmed as the new superintendent of the New York State Insurance Department in May this year, having served as acting superintendent since January 2005. Mills was a New York state assemblyman, representing Orange and Rockland counties, for three terms (1998-2004).

He served on the Assembly's banking, housing, insurance and ways and means committees. He was first elected to public office in 1989.

Superintendent Mills is also a major in the New York Guard, 56th Brigade; in the wake of 9/11, he was called to active duty and later awarded New York's 'Defense of Liberty' medal.

The superintendent of insurance is responsible for the monitoring and regulation of more than 1000 insurance companies, with cumulative assets exceeding $2trn. The position also includes overseeing more than 100,000 brokers, agents and financial in-termediaries, and the management of approximately 1500 department employees.

"The problem that we face politically is that there are some in the congress that don't want to have TRIA extended. They don't want federal involvement in the whole issue. They see it as a free market. What I say to those members is that this is one of those instances that demands government involvement - it is something that only the government can do.

"What are we talking about here? Unfortunately, we are living in a world where you have to think the unthinkable - a mega-catastrophe, a terrorism attack involving a biological dispersion device, a chemical attack or possibly a thermonuclear device that will produce major losses.

"To those of you that say will say, 'leave it to the free market', I say 'fine, but the free market will not write that type of cover.' They simply won't. It is far too risky for them without that safety net. TRIA allows them to have some degree of predictability in what is a very unpredictable market.

"One of America's greatest strengths is also one of America's greatest weaknesses: we have a very short collective memory. We don't look back, but forge ahead. But it is good to be aware that we are not immune to terrorist attacks, and the bombings in London were a sharp reminder of that. The fact that the British economy dealt with it so well was partly because the terrorism pooling system was in place to provide stability.

"Right after this interview with you, I'm going to film a news programme in front of a small florist shop. The florist was dropped by their insurer because of their perceived proximity to a possible terrorist target. Now that's an alarming development.

"Is there proportionately more lobbying on this issue being done from New York? I think it is fair to say our department has been leading the charge from the regulatory side in terms of terrorism, specifically. I think I am the only regulator to testify before both houses of congress, where I outlined this pooling idea.

"It is perceived incorrectly by some as a New York initiative, but it is really not a big city or urban initiative. It is a national issue.

The way terrorists could really hurt our economy is not to attack a major city, but a small city in the midwest. I think the fear and uncertainty that that would cause in the market would be even greater than if it were to happen in Chicago or Boston.

"What I hope will happen - and what I expect will happen - will be an expansion of TRIA with a definite sunset and then a longer-term model can be developed. Speaking as a former legislator, congress will take the path of least resistance. And the easiest thing that they can do is to extend TRIA, to park it, because the uncertainty that comes if they don't extend would be destructive."

A federal vs a state-by-state policy

Howard Mills is also heavily in favour of a federal policy to deal with (re)insurance for natural catastrophe, which he feels works far better than adopting a state-by-state approach.

"Rita and Katrina have raised awareness of the insurance issue, which is a good thing. It is an opportunity to focus on something that we know is out there. It wasn't a huge surprise that a major hurricane hit New Orleans, it was just a matter of when.

"One valuable lesson to learn from the hurricane losses is that is it is definitely less expensive to pre-fund than to post-fund. We can take precautions and build mechanisms and systems that will save money post-event. That is very clear now to the federal government.

"Now, in the past, the treasury have always objected to putting in a fund because it is perceived as a 'loss of revenue', but that is not the case. When you look at the money that is going to be spent in the wake of Katrina and Rita, there is serious concern about misappropriation of those billions and billions of dollars going down there. But who is to say how much of that is going to be wasted?

"So, certainly, it is evident that putting in place a plan prior to the event to build the capacity on is the way to go. Obviously, the capacity can be built much faster if it is done on a national scale and then shifted around the country as necessary to fit the resources, be it helping on the Gulf Coast or on the West Coast, for instance."

A positive spin on Spitzer

As for the ongoing investigations into insurance industry practices by the attorney general (Eliot Spitzer), Mr Mills made these observations: "One of the important after-effects of some of these investigations, I believe, it that there has been a very broad brush applied too often.

Finite reinsurance is not a bad thing - it is a legitimate product and has a role in the market place.

"This issue boiled down to the basics, and my message to the industry is this: when putting together a transaction, ask yourself, 'would the authorities look at this and infer that there is a real transfer of risk or a loan masquerading as insurance? If you think it is the latter, slow down. If it is the former, then okay, go ahead.

"Contingent commissions, bid-rigging and steering are not synonymous.

Bid-rigging and steering is illegal, and needs to be dealt with very harshly.

But it does not mean that contingent commissions are illegal. The bottom line is that there has to be disclosure and transparency so that the client knows that the broker is acting in their best interests - period.

"You cannot besmirch an entire industry that is critical to the global economy because of a few bad apples. It does not mean that the entire industry is rife with corruption, as some have said. That is irresponsibly stated.

"We want to help the attorney general do a better job in terms of spotlighting and solving problems, which in the year prior to my arrival here had got away from us."

A different handle on it

With this objective in mind, Mills is restructuring his department so that it is better equipped to maintain its proper role as a primary regulator by establishing a Corporate Practices Unit, a white-collar investigatory arm that attorneys are currently being hired to staff.

"If we have an issue like with the Marsh & McLennan indictments, I would deal with it differently than it was dealt with before. I would identify the people that caused the problem, take them out and throw the book at them, but you don't have to do it in a public manner that will impact the company and its innocent employees, shareholders and investors.

"I'm not saying we should sweep it under the rug, but again it's the way certain instances have been handled. Get the people that have done wrong, but don't impact on the company's stock price and have 5000 people losing their jobs. You don't have to announce your indictment before the end of the trading day. Be responsible!" declared Mr Mills emphatically, before hurrying off to the florist shop for the news programme on terrorism insurance, his television crew breathlessly in tow.

US Supplement
What's going on?
1 November 2005

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