Getting Insecure About Insurance?
Why did New York do a better job with Executive Life Insurance Co. than California?
Simple. The New York Insurance Department--long considered one of the toughest regulatory agencies in the country--exercised strict oversight of the financially troubled company. It seized Executive Life of New York after policyholders panicked in the wake of California’s seizure of Executive Life here.
New California Insurance Commissioner John Garamendi also moved quickly to seize control of Executive Life last week once the magnitude of the company’s problems put policyholders at risk. But now he faces an even bigger challenge: bestowing credibility on his California Insurance Department, which has long been perceived as bending over backwards to appease this powerful industry.
Garamendi should look East to his state insurance counterpart. New York state Insurance Superintendent Salvatore R. Curiale suggested that if California regulators had clamped down on insurance companies’ purchases of junk bonds, as New York had in 1987, the Executive Life crisis might have been prevented.
California regulators had been working with officials of the troubled Executive Life over the last year, but Garamendi’s predecessor, Roxani M. Gillespie, issued no warnings to the public about the company’s financial problems nor did she direct Executive Life to stop selling policies. She did not support a legislative effort to limit junk bond holdings. Executive Life’s former, high-flying Chairman Fred Carr even managed to park $10.7 million in deferred compensation in a new subsidiary that was not subject to California regulation. Fortunately, he cannot collect before policyholders are paid.
In New York, the Insurance Department earlier this month ordered Executive Life of New York to stop writing new policies and increase its reserves by $125 million. Tuesday New York regulators seized the New York company, which is solvent, because the publicized demise of its sister California company triggered a wave of policy redemption requests.
Garamendi is the first California insurance commissioner to be elected. His predecessors at the 100-year-old department all have had some affiliation with the insurance industry. Could the California Insurance Department have staved off the biggest insurance failure in the history of the business? The answer will never be known. But clearly the department should be more aggressive and assiduous in its oversight activities. That’s especially true now that consumers and policyholders need more assurance than ever that the industry is accountable and responsible.
