United States: The New York State Department Of Financial Services At The One-Year Mark: A New Aggressive Regulator Worth Following

Since the New York State Department of Financial Services ("DFS") began operations in late 2011, the agency appears to have lived up to its billing as an activist regulator of insurers and financial institutions. DFS has taken on several novel issues and will likely continue to do so. Insurers and financial institutions doing business in New York should keep DFS on their radar given the scope of its regulatory mandate and its initial enforcement activities since inception. Institutions outside New York may also want to monitor DFS's initiatives, which may pique the interest of federal or state law enforcement and regulatory agencies in other jurisdictions and lead to similar or parallel initiatives.  

DFS's Actions Since Inception   

On October 3, 2011, the former New York State Banking and Insurance Departments were combined to create DFS.1 The 4,400 entities DFS supervises have about $6.2 trillion in assets and include all insurance companies in New York, all depository institutions chartered in New York, the majority of United States-based branches and agencies of foreign banking institutions, mortgage brokers in New York, and other financial service providers.2

Since October 2011, DFS has announced several notable enforcement actions. Most recently, DFS entered into a settlement concerning the so-called force-placed insurance industry, which DFS began to investigate in October 2011. Force-placed insurance, also known as lender-placed insurance, is insurance that a bank, lender, or mortgage servicer places on a property that does not have the coverage required by the mortgage.3 Lenders typically obtain force-placed insurance to replace coverage that the borrower has allowed to lapse or to supplement coverage the bank or mortgage servicer determines is insufficient. After its investigation, DFS claimed that the premiums borrowers pay for force-placed insurance can be two to 10 times higher than premiums for voluntary insurance and typically provides less protection. The borrowers pay the costs of the higher premiums, and investors in residential mortgage-backed securities may in turn bear the costs if a foreclosure occurs. In March 2013, DFS settled with the country's largest force-placed insurer over DFS's claims that homeowners had been overcharged for force-placed insurance.4

Shortly after the settlement was announced, the Federal Housing Finance Agency ("FHFA"), which oversees Fannie Mae and Freddie Mac, filed a notice prohibiting the payment of fees or commissions by insurers for force-placed insurance.5 The notice states that the FHFA considers force-placed insurance to be "contrary to prudent business practice, to appropriate administration of Fannie Mae and Freddie Mac [] guaranteed loans" and exposes Fannie Mae and Freddie Mac to "potential losses as well as litigation and reputation risks." A large portion of the costs for unpaid insurance are passed onto Fannie Mae and Freddie Mac.6

After the announcement of the settlement with the force-placed insurer, DFS's Superintendent, Benjamin W. Lawsky, sent a letter to other state insurance commissioners pressing them to pursue the same investigative and enforcement steps DFS had taken in the force-placed insurance industry. Recent public remarks by Superintendent Lawsky indicate that he believes any successful DFS initiatives can be a model for the investigation and prosecution of similar issues by other federal and state prosecutors and regulators. In the Superintendent's words, "[a] dose of healthy competition among regulators is helpful, and necessary, to preserve the safety and stability of our financial sector."7 In Lawsky's view, DFS's work should be understood in the context of three types of federalism: (i) "cooperative federalism," (ii) "persuasive federalism," and (iii) "coercive federalism."8 As Lawsky frames it, cooperative federalism occurs when a state regulator works closely and in collaboration with other federal and state regulators.9 Persuasive federalism arises when state regulators lead by example, as with the force-placed insurance settlements that DFS achieved.10 In Lawsky's view, DFS should resort to coercive federalism when it believes it must take more significant action before other regulatory agencies.11

DFS's Focus in 2013 

DFS Superintendent Lawsky has outlined in recent public statements three new issues that DFS will focus on this year: (i) ownership of insurance companies by private equity firms, (ii) captive insurance companies, and (iii) monitors.12

Ownership of Insurance Companies by Private Equity Firms. In the coming months, DFS will investigate investments made by private equity firms in insurance companies, particularly those that write annuity policies. DFS has found that ownership of insurers by private equity firms has grown dramatically over the past year. According to DFS, private equity's rapid growth in the insurance field may in part be due to the fact that certain regulations for insurance companies are not as strict as those for banks. Superintendent Lawsky has expressed the opinion that private equity firms can be unreasonably aggressive with risk and use significant leverage to maximize profits in a relatively short time frame. He believes this approach is at odds with the long-term outlook of annuity policy holders and could put them unnecessarily at risk. Moody's Investors Service also identified this as a potential issue in a recent research report.13

Captive Insurance Companies. In the typical captive insurance arrangement, a non-insurance parent company creates and owns a "captive" to insure the parent's risk.14 Recently, some insurance companies have created special purpose vehicles that act as captives for the purposes of reinsurance, securitization, or reserve financing purposes.15

DFS began investigating the captive insurance industry in July 2012 when it sent letters to about 80 life insurers requesting information on their financial arrangements with captive insurance companies.16 Superintendent Lawsky has said he is concerned with how insurers are using captive insurance companies to move billions of dollars in liabilities to offshore entities—most commonly to Bermuda or the Cayman Islands—or to states where the insurer is not based—most commonly Vermont.17 He argues that what he describes as a "shadow insurance" industry is putting the greater financial industry at risk. He further asserts that insurers use the reserves they have moved offshore for other purposes, even though the parent company may be a guarantor and therefore liable for any claims on reserves that have been diverted to other jurisdictions.  

DFS is not the only agency investigating how reserves are being stored in captives. The National Association of Insurance Commissioners and the Federal Insurance Office are also examining the issue.18

Monitors. Monitors or consultants are periodically placed in a bank or insurer to ensure that the entity is complying with a regulatory or prosecutorial order or agreement. Because such monitors are hired and paid by the entities they are charged with monitoring, Superintendent Lawsky sees potential conflicts of interest. He believes that regulators should more actively manage monitors and that communications between monitors and regulators should improve. 

Conclusion 

Given DFS's aggressive posture, its willingness to examine new issues, and its desire to establish precedents for other regulators and prosecutors to follow, banks, insurers, and other financial institutions—both in and outside New York—should keep DFS and its activities in view. In particular, given the particular subjects Superintendent Lawsky has stated will be a focus for DFS this year, private equity firms with certain insurance investments should be prepared to respond to DFS regulatory inquiries concerning whether their investment objectives are consistent with the interests of policy holders. In addition, banks and other financial institutions should be prepared to answer inquiries about the independence of any monitors or similar consultants affiliated with their organizations.  

Footnotes

1.For a fuller discussion of the creation of DFS and its powers, please see our December 2011 Jones Day Commentary, "The Department of Financial Services: New York's Newest Financial Regulator" (available at http://www.jonesday.com/department_of_financial_services/.

2.DFS web site, http://www.dfs.ny.gov/about/staff_bios/blawsky.htm (last visited May 8, 2013).

3.Press Release, DFS, Mar. 21, 2013.

4.Id.

5.Lender Placed Insurance, Terms and Conditions, 78 Fed. Reg. 19263-64 (Mar. 29, 2013).

6.Alan Zibel and Leslie Scism, "U.S. Cracks Down on 'Forced' Insurance," Wall St. J. (Mar. 26, 2013).

7.Evan Weinberger, "New York Bank Regulator To Examine Compliance Consultants," Law360 (Apr. 18, 2013).

8.Elizabeth D. Festa, "NY doubles down on captives, private equity firm scrutiny," LifeHealthPro (Apr. 18, 2013) (available at http://m.lifehealthpro.com/2013/04/18/ny-doubles-down-on-captives-private-equity-firm-sc).

9.Id.; Benjamin M. Lawsky, "Regulating in an Evolving Financial Landscape," The A.A. Sommer, Jr. Lecture at Fordham Law School, Apr. 18, 2103.

10.Id.

11.Id.

12.Lawsky, supra note 9.

13.Darla Mercado, "Private-equity jumping into annuities could be bad news for insurers," InvestmentNews, Jan. 29, 2013 (available at http://www.investmentnews.com/article/20130129/FREE/130129941#).

14.National Association of Insurance Commissioners web site, Captive Insurance Companies, http://www.naic.org/cipr_topics/topic_captives.htm (last updated Dec. 19, 2012).

15.NAIC Captives and Special Purpose Vehicle Use Subgroup of the Financial Condition Committee, Captives and Special Purpose Vehicles, NAIC Draft White Paper, Mar. 14, 2013, at 8 (available at http://www.naic.org/committees_e_cspv_sg.htm).

16.Leslie Scism and Serena Ng, "Regulators Probe 'Captives'," Wall St. J. (Aug. 5, 2012).

17.Lawsky, supra note 9; National Association of Insurance Commissioners web site, supra note 14.

18.Elizabeth Festa, "Leonardi critical of FIO's new captives task force," LifeHealthPro, Mar. 17, 2013 (available at http://www.lifehealthpro.com/2013/03/17/leonardi-critical-of-fios-new-captives-task-force).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Robert W. Gaffey
Howard Sidman
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.