" title="Peter H. Bickford Legal & Dispute Resolution Services"> Peter H. Bickford Legal & Dispute Resolution Services

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!

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.