July 23, 2008

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!

What do you think?

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