The British Invasion
If New York’s Dinallo follows
the Brit example, insurance regulation will never be the
Brace yourself for another British invasion. No, it’s
not Spice Girl Posh and hubby David Beckham, but a theory of
regulating—so-called principles-based regulation. The
approach, introduced by UK’s Financial Services Authority
(FSA) in its market in 2001, has crossed the pond and landed on
the desk of New York’s new insurance superintendent, Eric
This summer, Dinallo unveiled a draft regulation for
insurance titled “Principles Applicable to Insurers and
Other Entities Subject to the Insurance Law.” The draft
represents a first stab at raising the idea for discussion in
Briefly, principles-based regulation means setting
high-level principles and letting businesses decide how best to
meet those goals—within reason, that is. The approach
shifts away from prescriptive rules imposed by the regulator
and places more responsibility on the business to act
appropriately as a corporate citizen. The goal is to make both
regulation and the market more efficient.
This is not a new idea as anyone who took a college
economics course knows. In his book The Wealth of Nations, Adam
Smith argued that markets are most efficient if left to their
own designs. The less government intervention into private
economic decisions, the more efficient the market will be in
delivering the goods and services people want and need at a
Classic economics argues that government should only get
involved if the market fails. Market efficiency also depends
heavily on transparency, which is why the FSA emphasizes the
importance of “treating customers fairly” and
providing the information they need to make informed
The cost of unnecessary and inefficient regulation to the
economy is significant. By some estimates, complying with
federal and state government regulations costs as much as $1.4
trillion. Americans for Tax Reform reports that the average
American has to work 192 days in 2007 to pay the cost of
federal, state and local taxes and regulations. The cost of
government consumes 52.6% of national income. Small businesses
pay 45% more per employee than large companies to comply with
The FSA acknowledges that it won’t get away entirely
from detailed rules, but it sees real benefits for business,
markets and consumers as well as for regulators.
The FSA says it will carefully consider whether there is a
market failure that needs to be addressed by regulation. If it
does, it will assess the potential costs and benefits of
regulatory intervention and whether there is a better way to
accomplish the same goal.
Earlier this year, N.Y. Gov. Eliot Spitzer named Dinallo to
head a commission to consider how to modernize the
state’s financial services regulatory system and possibly
bring insurance, banking and securities under the same roof.
Principles-based regulation may be a part of that plan.
In an interview with the Leader’s Edge early this
year, Dinallo said when it comes to regulation, “I think
it’s fair game to ask, ‘What’s the wrong the
rule sought to prevent?’” If it is outdated or
ineffective, then it should be changed or eliminated.
Dinallo’s 10 proposed principles for insurance mirror
the FSA’s. A licensee shall:
- Conduct its business with integrity, due skill and
- Take reasonable care to organize and control its affairs
responsibility and effectively, with adequate risk management
- Maintain adequate financial resources
- Observe proper standards of market conduct
- Pay due regard to the interests of its clients and treat
- Pay due regard to the information needs of its clients
and communicate information to them in a way that is clear,
fair and not misleading
- Manage conflicts of interest fairly, both between the
licensee and its clients and between clients
- Take reasonable care to ensure the appropriateness or
suitability of its advice and discretionary decisions for any
person or other entity that is entitled to rely upon
- Ensure that the assets of any client for which the
licensee is responsible are adequately protected
- Interact with the superintendent and other regulators in
an open and cooperative way, and disclose to the
superintendent any information relating to the licensee of
which the superintendent would reasonably expect notice.
For an industry that doesn’t like uncertainty, these
inspirational principles are likely to put the fear of Spitzer
in them…and put their lawyers on high alert. After all,
the insurance sector experienced Spitzer’s
“interpretation” of laws and regulations
These non-specific principles are open to wide
interpretation without guidance from the regulator.
The FSA model envisions a strong partnership and ongoing
consultation with the regulated industry. Regulators have to
underpin the principles with rules and guidance on what
constitutes compliance. And the industry has to be a partner in
those discussions if the approach is to succeed.
I applaud Dinallo for this experiment. The Council has long
advocated eliminating unnecessary, burdensome and costly
regulations that add no value to consumers or oversight. If
successful, the initiative could encourage more innovation and
efficiency for our industry.
But ironically, the devil is in the details.
Kemper is The Council’s vice
president of Industry Affairs.