May 6, 2013 by C Acunto

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VOLUME 124, NUMBER 9 / May 6, 2013

A CINN Group, Inc. Publication

Serving: New York, New Jersey, Connecticut, Pennsylvania and Washington D.C. Since 1889

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Contents

May 6, 2013 | volume 124 number 9

[COVER STORY ] 10

Regulatory Reasoning: Recent Lawsky Speach Reveals Regulatory Approaches Betty Flood and Katlin Nash

[FEATURES] 4

Foreword: “Dog ate my homework” is not included. Steve Acunto, Publisher

Insight: Healthy Competition Peter H. Bickford

Remarks: Supt. Lawsky at the 22nd Annual Hyman P. Minsky Conference

On the Level: The Time is Now Jamie Deapo

Face to Face: One From Column “A” Michael Loguercio

In the News: TAPCO Underwriters Expands Western Presence

In the Associations

Classiﬁeds

Looking Back: May, 1988

Crackdwon: Fraudulent of Out-of-State Registration

30 34

[AD FEATURES] 19

The D.B.L. Center LTD: $170 Not Enough? The D.B.L. Center Ltd. Offers More Disability Beneﬁt Choices Michael Fliegelman, CLU, CHFC, AEP, RFC: What is the sign of a good decision?®

Like us on Facebook… The Insurance Advocate Magazine INSURANCE ADVOCATE / May 6, 2013 3

[ FORE WORD ]

Steve Acunto

“Dog ate my homework” is not included.

EDITOR & PUBLISHER Steve Acunto 914-966-3180, x110 sa@cinn.com CONTRIBUTORS Peter H. Bickford Jamie Deapo Michael Loguercio Sari Gabay-Raﬁy Lawrence N. Rogak N. Stephen Ruchman Jerome Trupin, CPCU

2. I’m lost and unfamiliar with the roads: 15.6 percent 3. I didn’t know it was broken: 12.4 percent 4. Everyone else was doing it: 6.4 percent 5. I’m having an emergency situation in my car. (For instance, spilled a hot drink on your lap.): 5.4 percent

PRODUCTION & DESIGN ADVERTISING COORDINATOR Creative Director Gina Marie Balog 914-966-3180, x113

6. I missed my turn/exit: 4.8 percent 7. I had to go to the bathroom: 4.6 percent 8. I didn’t do anything dangerous: 4.2 percent

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9. I was on my way to an emergency. (For example, to help someone who is ill or injured.): 4 percent

SUBSCRIPTIONS P.O. Box 9001, Mt. Vernon, NY 10552 914-966-3180, x126

10. My GPS said it was the right thing to do: 2.2 percent 11. I’m just helping out; I wasn't even supposed to be driving. (For example, your friend is intoxicated.): 2 percent.

circulation@cinn.com

“By now, police officers can probably finish people’s sentences,” said Michelle Megna, managing editor of Insurance.com. “I wonder if they wouldn’t appreciate a little dogate-my-homework creativity.”

Helping out Men are more likely to rationalize their driving behavior by saying they were being altruistic – "I'm just helping out. I wasn't even supposed to be driving!" Among people who have used this excuse, 90 percent were men. Among people who said they have used the excuses listed above, here are the differences in men vs. women:

PUBLISHED BY CINN Group, Inc. P.O. Box 9001, Mt. Vernon, NY 10552 (914) 966-3180 | Fax: (914) 966-3264 www.cinn.com | info@cinn.com President and CEO Steve Acunto

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I couldn't see the sign telling me not to do it. Men: 38 percent Women: 62 percent

POSTMASTER Send address changes to Insurance Advocate®, PO Box 9001, Mt. Vernon, NY 10552. Allow four weeks for completion of changes.

I’m lost and unfamiliar with the roads. Men: 35 percent Women: 65 percent

4 May 6, 2013 / INSURANCE ADVOCATE

VOLUME 124, NUMBER 9 MAY 6, 2013

A new survey by Insurance.com called “Ticketmasters” ranks popular excuses drivers give to police when stopped for a potential violation.. Among people who said they have used excuses when pulled over by a police officer, here’s how explanations break down: 1. I couldn’t see the sign telling me not to do it: 20.4 percent

I didn’t know it was broken. Men: 39 percent Women: 61 percent

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continued on page 43

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[ INSIGHT ]

By Peter H. Bickford

Healthy Competition

ew York’s superintendent of financial services, Benjamin Lawsky, spoke recently about healthy competition. Before you get too excited about a new direction for the DFS, I should point out that he was talking about competition among financial regulators, not among insurance companies or

Peter H. Bickford

they’re getting a fair deal. They’ll do more business here.” While hard to argue with the concept, to date the “fair deal” for insurers remains difficult to find. In fact, superintendent Lawsky’s outlook is a scary one, not just for insurers doing business or seeking to do business in New York, but also for the “consumers, entrepreneurs, and

One of the more unsettling observations about Lawsky’s speech (and there are a number of them) is the almost full focus on regulators and their enforcement against supposed bad players in the financial community, and almost nothing about the development of competition, or providing for growth and stability within the insurance and banking industries.

other industry participants (see related article this issue). Speaking at a highly-regarded conference on the state of the US and world economies held in NYC in April, Superintendent Lawsky stated, “[a] dose of healthy competition among regulators is helpful and necessary to safeguarding the stability of our nation’s financial system. Not just today – but for the long term.” One of the more unsettling observations about Lawsky’s speech (and there are a number of them) is the almost full focus on regulators and their enforcement against supposed bad players in the financial community, and almost nothing about the development of competition, or providing for growth and stability within the insurance and banking industries. Oh sure, there were the perfunctory statements that one of the purposes of the merger of the banking and insurance departments into the department of financial services was to help those industries thrive and “to keep New York the financial capital of the world.” He also justified the DFS enforcement approach by stating: “When consumers, entrepreneurs, and investors have confidence in the integrity – the safety and the soundness – of their banks and insurers. When they know 6 May 6, 2013 / INSURANCE ADVOCATE

investors” he purportedly seeks to entice through his words and DFS’s actions. Superintendent Lawsky used three insurance related examples in his talk: forcedplaced insurance, captives as a vehicle to move reserves off-shore, and the acquisition of insurance books of business – particularly annuity books – by private equity firms. We have all read about the forced-placed insurance issue – the DFS has made sure of that! Insurance Advocate itself ran a feature on the $14 million settlement with Assurant, the largest writer of the product in NY, in the April 8, 2013 issue. Without minimizing the consequences to certain borrowers – the issue is certainly a legitimate one for regulatory consideration -- the zealousness and anti-industry vitriol with which the DFS has pursued the topic seems out of proportion. In his speech, for instance, Superintendent Lawsky refers to the problem as “a dirty little secret in the insurance industry,” and urged other states to follow NY’s lead to “help end the kickback culture that has pervaded this industry . . .” These are amazing statements coming from our chief regulator, particularly when there was no allegation of an actual violation of existing laws or regulations. This product, at least when written in New York, must be on forms and at rates approved by the New York regulators (an

interesting condition in the settlement with Assurant is that it agrees to file new rates). If forced placed insurance is a failure to properly protect consumers, isn’t it as much a regulatory failure as a company failure? And if the business was so lucrative, why is it that only two companies wrote 90% of the business? How is this over-the-top negative branding of the industry in any way helpful to the development and growth of the insurance business in NY? (The irony is not lost that the superintendent’s zealousness to hold insurance companies accountable for their misdeeds -- as perceived by him -- does not apply to entities under his direct supervision, e.g. Executive Life, whose failed rehabilitation under the management of the NY Liquidation Bureau has cost policyholders close to $2 billion to date.) The second example used by Superintendent Lawsky (its actually the third example, but I am saving the best for last) is the transfer of books of business to special vehicles – usually offshore captives – where reserve and oversight requirements are “looser.” Again, this is a meaningful regulatory inquiry, and is one that is being considered nationally by the NAIC. If the rules need to be changed to address a legitimate issue not currently or adequately addressed, it is an appropriate regulatory topic. The problem is when a regulator’s legitimate inquiry is prefaced by punishing players who are following existing rules. Interestingly, at its most recent meeting, the NAIC adopted a recommended course of action to investigate and pursue the issue, but NY abstained in the vote. One would hope that this failure to support the NAIC initiative was not for fear that the NAIC’s action on the topic would take away from NY’s “leadership” on the issue. The third example used by Superintendent Lawsky is the most fascinating, not so much for what he is trying to say, but for his apparent lack of understanding of the business and history of the insurance industry. Superintendent Lawsky is concerned about “private equity firms . . . becoming active in the acquisicontinued on page 8

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[ INSIGHT ] continued from page 6

tion of insurance companies.” Why? Because “these private equity firms are more short-term focused – when [insurance] is a business that’s all about the long haul.” The incredible thing about this view is that he sees it as an emerging trend! There is not enough room in this short column to present Superintendent Lawsky and his colleagues with a history of the insurance business, but to think that this tension between short term gains v. long term commitments is something new to the industry is beyond amazing! I apologize in advance for any condescending tone, but really! Perhaps someone from Lloyd’s could explain to him how for over 300 years it has managed capital coming into and leaving the market in a controlled, financially sound manner. Perhaps his own staff could explain to him the insurance laws providing for regulatory control over investments, reserves, dividends and transfers of interest. And perhaps some major company leaders, particularly those with offshore operations, could explain the explosion of alternative markets and products designed to draw the very type of investment he is con-

cerned about, and that have resulted in the flight of capital from the New York and US insurance markets for decades. (This position also gave me my one Aha! moment from the speech. It has long been a mystery to me why, with all the momentum created by his two predecessors -- Messrs. Dinallo and Wrynn -- for a new, modern, financially sound but flexible insurance risk exchange, the new administration has remained totally silent about the topic. Mystery solved!) In his conclusion, Lawsky returned to his theme of healthy competition among regulators, using a range of terms from “collaborative or cooperative federalism”, to “persuasive federalism” to “coercive federalism.” These are fascinating terms, but I will leave parsing them to others or until another day. For the moment, my main concern with Superintendent Lawsky’s speech and the actions of the DFS reﬂected in it, is the chilling effect they will have on the very entrepreneurs and investors he states are so important to “keep New York the ﬁnancial capital of the world.” [IA] (A copy of Superintendent Lawsky's speech is accessible from the DFS website at http://www.dfs.ny.gov/about/speeches_testi mony/sp130418.htm)

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[ COVER ]

By Betty Flood and Katlin Nash

REGULATORY REASONING: Supt. Lawsky Reflects on Approaches to His and Colleagues’ Roles See commentary page 6.

LBANY, N.Y.—New York Superintendent of Financial Services Benjamin M. Lawsky spoke at the 22nd annual Hyman P. Minsky Conference on the state of the U.S. and world economies in New York State and what the Department of Financial Services is doing to improve the insurance and banking industries. Superintendent Lawsky said, “In the wake of a devastating financial crisis law makers, regulators, the financial industry, consumer advocates, and a wide range of stakeholders are building a new architecture of a reformed Wall Street. That is a dynamic, ongoing process.” “Regulators need to remain vigilant because there is a constant danger that putting a thumb in the dike in one part of the financial system will cause a leak to spring somewhere else,” explained Lawsky. The New York State Department of Financial Services (DFS) was created through a merger of two existing state agencies: the New York State Banking Department and the New York State Insurance Department and is only about eighteen months old. “Sometimes financial regulators find that moving in a new direction is akin to turning a battleship in a bathtub. Institutional inertia can stymie even the most-well intentioned watch dogs,” said Lawsky. 10 May 6, 2013 / INSURANCE ADVOCATE

“When Governor Andrew M. Cuomo proposed creating DFS he gave us a clear mission. He wanted the industries DFS regulates to thrive. He wanted to keep New York the financial capital of the world.”

“When Governor Andrew M. Cuomo proposed creating DFS he gave us a clear mission. He wanted the industries DFS regulates to thrive. He wanted to keep New York the financial capital of the world,” explained Lawsky. Forced placed insurance which is taken out by a bank on behalf of the home owner when a home owner does not maintain the insurance required by the terms of a mortgage was Lawsky’s first involvement in the new department. In October 2011 DFS launched an investigation into the forced placed insurance industry. “When we con-

ducted our investigation there was very little competition and very little high rates in the forced-insurance industry. Our investigation was looking at why this was happening when sometimes a homeowner who was already in financial trouble got ‘forced-placed’ into an insurance policy their rate jumped two to three times higher despite the fact that forced-placed insurance provides far less protection for home owners than voluntary insurance.” DFS investigation produced a major settlement with the Country’s largest forced-placed insurer, Assurant which controls 70% of the market in New York. The settlement includes restitution for homeowners who were harmed, a $14 million penalty pay to the State of New York and industry-leading reforms that will save homeowners, tax payers, and investors millions of dollars going forward through lower rates. “An additional settlement with the nation’s second highest forced-placed insurer QBE includes a $10 million penalty, restitution for homeowners, and New York’s industry-leading reforms. Companies representing more than 90% of this market in New York have signed onto our reforms,” explained Lawsky. “It was essentially a dirty little secret in the continued on page 12

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[ COVER ] continued from page 10

insurance industry.” DFS has begun to play an important and instructive role in anti-money laundering. “We wanted the banking industry to take it a lot more seriously given the threat it posed not only to our financial system, but to our national security,” said Lawsky. According to the Superintendent banks were sometimes effectively serving as financial terrorists, other enemies of our country and perpetrators of some of the most vile human rights abuses anywhere on earth. DFS took action against a particular bank, “Standard Charter Bank” in New York City. “Our investigation uncovered the bank had hidden from the US and other regulators roughly 60,000 secret transactions involving at least $250 billion, reaping the company hundreds of millions of dollars in fees. New York ended up securing a $340 million settlement and a set of reforms to stop these problems.” “The Independence and integrity of monitors and independent consultants is another area of vital concern to DFS,” said Lawsky. “These consultants are installed at banks and other companies usually after an institution has committed serious regulatory violations or broken the law. The intent is the monitor assists companies in improving controls and ensuring violations do not reoccur.” “However, the outcome of a mentorship is disappointing as we recently saw in the context of the national mortgage review. This can be blamed on a number of factors worth considering that our current system significantly undermines the independence of the monitors-the monitors are hired by the banks they’re embedded physically at the banks, they are paid by the banks, and the depend on the banks for future business,” claimed Lawsky. Lawsky told the conference there is also insufficient communication between monitors and regulators. “Frequently monitors never hear from regulators once they are put in place at a bank. There needs to be regular meetings between regulators and monitors and weekly updates on progress should be happening. At DFS we have already instituted a more robust process in the selection of monitors and we will be 12 May 6, 2013 / INSURANCE ADVOCATE

pushing more broadly for change in the dynamics between regulators, monitors, and institutions. You will likely be seeing some innovative initiatives from DFS in this area in the coming weeks and months and we expect those actions will help propel reform at both the State and federal levels. One very important question we need to be asking is when monitors and consultants perform poorly or worse when they intentionally obscure problems at banks: what should the consequences be? Because if we allow intentional conduct aimed to quietly sweeping problems at banks under the rug, we are truly undermining our whole system of prudential regulation. At some point we must take action that has real consequences or the problem in our system will continue to be perpetuated rather than deterred.” Superintendent Lawsky also hit on annuity companies that sell insurance products that essentially promise a certain payment every year or months whatever the terms of the policy may be over a particular period of time. “If you look at the deals completed or announced to date, private equity-controlled insurers now account for nearly 30% of the indexed annuity market up from 5% a year ago and 15% of the total fixed annuity market up from 4% a year ago. This is driving DFS to take a close look at these transactions and these firms and to ensure the safety and soundness of these companies and consumers both remain protected.” “Annuities are very popular products that a significant number of Americans rely on to help finance their retirements. The risk we are concerned about at DFS is whether these private equity firms are more short termed focused when this is a business that is all about the long haul.” “Because of their potential short term focus there is a risk that these companies may not be delivering the level of compliance and customer service that we’d expect of them given the importance of this product to so many seniors on fixed incomes. If just a few of these investments work out than the firm can be very successful and the failed ventures are just viewed as a cost of doing business.” “Private equity firms typically manage their investments with a much shorter time horizon for example three to five years than is typically required for prudent insurance

company management. They may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns. At DFS we regulate banks and insurance companies. Private equity firms rarely acquired control of banks, not because there are prohibited from doing so, but because the regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like. These regulatory requirements in the banking industry are designed in part to encourage a long-term outlook and ensure that person controlling the company has real skin in the game. The long term, nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank. Private equity firms typically manage their investments with a much shorter time horizon for example three to five years than is typically required for prudent insurance company management. They may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns. We need to ask ourselves whether we need to modernize our regulations to deal with this emerging trend to protect retirees and to protect the financial system and it is one where DFS is moving to ramp up its activity. Another area DFS is looking at relates to the use of captive insurance companies used to off-load risk and increase leverage at some for the world’s largest financial firms. Superintendent Lawsky said, “Insurance companies use these captives to shift blocks of insurance policy claims to special entities often in states outside where the companies are based or else offshore such as the Cayman Islands in order to take advantage of looser reserve and oversight requirements. In July 2012, the DFS initiated a serious investigation into this somewhat obscure area, which could put insurance policy holders and taxpayers at greater risks. In a typical transaction an insurance company creates a “captive insurance subsidiary” which is essentially continued on page 14

Senator John Sherman Author, Sherman Antitrust Act

a political king over and sale of life.”

Sen. John Sherman 21 Cong. Rec. 2456 (1890)

“If we would not submit to an emperor we should not submit to an autocrat of trade, with the power to prevent competition...”

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[ COVER ] continued from page 12

a shell company owned by the insurer’s parent. The company then “reinsures” a block of existing policy claims through the shell company and diverts the reserves that it had previously set aside to pay policyholders to other purposes, since the reserve requirements for the captive shell company are typically lower.” Lawsky said, “This financial alchemy,

let’s call it ‘shadow insurance,’ does not actually transfer the risk for those insurance policies off the parent company’s books, because in many instances the parent company is ultimately still on the hook for paying claims if the shell company’s weaker reserves are exhausted (‘a parental guarantee’). This means that when the time finally comes for the policy holder to collect their promise benefits after years of paying premiums such as when there is a

death in their family there is a smaller reserve buffer available at the insurance company to ensure that the policy holders receive the benefits to which they are legally entitled.” “We are hard at work and are continuing investigation into shadow insurance and we hope to shed light on and further stimulate a national debate on this important issue to our financial system,” concluded Lawsky. [IA]

We present Supt. Lawsky’s speech in its entirety below. - SA

Remarks of New York Superintendent of Financial Services Benjamin M. Lawsky at the 22nd Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies in New York City April 18, 2013 I am deeply honored to have the opportunity to address you today. This year’s conference has brought together an impressive list of speakers and panelists and I’m sure the discussions and speeches during this three-day conference will provide valuable insights on improving the state of our global economy. I very much appreciate Dimitri Papadimitriou’s introductory remarks and the opportunity to address the members of this conference. Also, it is important to recognize the Levy Institute at Bard College and the Ford Foundation for hosting this conference. *** The theme of what I want to talk with you about today, “Regulating in an Evolving Financial Landscape,” speaks to a unique set of challenges that we now face together as financial regulators and as a country. In the wake of a devastating financial crisis, lawmakers, regulators, the financial industry, consumer advocates, and a wide range of other stakeholders are building the new architecture of a reformed Wall Street. That’s a dynamic, ongoing process. As you well know, it didn’t end the day – three years ago, on 14 May 6, 2013 / INSURANCE ADVOCATE

July 21, 2010 – when the President signed Dodd-Frank into law. Through Dodd-Frank, the President and Congress provided regulators in Washington with a robust framework for reform. But they left the specific contours of those new rules of the road up to a set of federal agencies writing regulations on matters SUPERINTENDENT as diverse as the Volcker Rule, BENJAMIN M. LAWSKY living wills, orderly liquidation authority, risk retention, qualified residential mortgages – and a whole long list of other terms and acronyms that were foreign to us only a few short years ago. While regulators in Washington have made important progress implementing those critical reforms – the rules of the road are still not yet fully written. And, of course, even when the ink is dry on every last regulation, there will remain – as there always is – a constant push and pull continued on page 16

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***

between regulators and the financial industry as market participants adjust to the new rules of the road. Regulators need to remain vigilant. Because there is a constant danger that putting a thumb in the dyke in one part of the financial system will cause a leak to spring somewhere else.

The New York State Department of Financial Services – or DFS as we like to call it – was recently created through the merger of two existing state agencies with long histories: the New York State Banking Department (which was founded in 1851) and the New York State Insurance Department (which was established in 1859).

A danger that well-intentioned reforms could push risk to everdarker corners of the financial system. To financial products not yet envisioned by even the most far-sighted of regulators.

However, DFS – in its current, unified structure – is only about eighteen months old. So, in many ways, we’re the new regulator on the block.

The lure of potential profits is too great. And the dynamism of the global economy is too strong, for the financial system to stand frozen in time.

The Federal Reserve has been around for about a century. The FDIC has been protecting depositors since the Great Depression. And the U.S. Treasury Department has served a vital role in managing our nation’s finances since the founding of our republic.

This is not to say – as some suggest – that the art of financial regulation is a futile endeavor. That we should resign ourselves to a financial system that forever careens from crisis to crisis.

At DFS, we’re fortunate to work with federal partners who have a deep well of institutional knowledge and expertise – which complements our own.

Far from it. It just means that we should approach the constantly evolving landscape of the financial sector with a deep sense of humility about the capacity of any one set of reforms or safeguards to permanently preserve the stability of our kinetic, frenetic global financial system.

We’ve collaborated with our federal partners closely and cooperatively on a number of issues of common interest. Moreover, at DFS, like our other regulatory partners, we have a commitment to thorough, thoughtful, diligent work. But we also have another key attribute at DFS.

And this deep sense of humility shouldn’t fade with the passage of time – when the 2008-09 financial crisis becomes a page in the history books rather than a fresh wound. To be sure, Dodd-Frank represents the most far-reaching set of reforms to our financial system since the Great Depression.

We’re nimble. And we’re agile. And we’re able to take a fresh look at issues across the financial industry – both new and old. Sometimes financial regulators find that moving in a new direction is akin to turning a battleship in a bathtub. Institutional inertia can stymie even the most well-intentioned of watchdogs.

But we can’t become complacent. And one critical part of avoiding that fate – avoiding complacency – is what I will call “healthy competition in financial regulation.” A dose of healthy competition among regulators is helpful and necessary to safeguarding the stability of our nation’s financial system. Not just today – but for the long term.

But as a newly created regulator, DFS isn’t necessarily wedded to existing ways of doing business. Indeed, similar to the example of the broader economy, when there’s a new entrant into the marketplace, it often spurs others to reexamine existing processes and practices. To innovate. At DFS, we can shine a spotlight wherever we think it needs shining.

Healthy Competition in Financial Regulation So what do I mean by healthy competition in financial regulation?

When banks are engaging in practices that threaten our country’s financial stability and national security – we can take swift action.

It’s not so dissimilar to what economists talk about when they discuss healthy competition in the broader economy.

When consumers are being abused – we can move rapidly to right those wrongs.

Or what Supreme Court Justice Louis Brandeis meant when he called the states “laboratories” of democracy during the Progressive Era.

Sometimes, that means DFS may be out in the lead on a particular issue. continued on page 18

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But I think that’s healthy. Not only for the financial regulatory community, but for the long-term strength of the financial industry and our nation’s economy.

With that in mind, I wanted to discuss a couple recent examples of DFS actions that we hope will play an important, constructive role in strengthening the long-term health of the financial system: First, a corner of the insurance industry called ‘force-placed insurance.” And second, anti-money laundering enforcement.

Problems with Unhealthy Competition Indeed, it may also be helpful to define healthy competition in opposition to the type of unhealthy competition that we saw during the lead up to the financial crisis. When the system turned on its head and the debate turned to who could water down standards the most. Who could provide the “lightest touch” regulation at the firms they oversaw.

Additionally, I wanted to highlight a few other areas in financial regulation that DFS is taking a hard look at right now – where healthy competition may play a vital role going forward. Those include: (1) conflicts of interest in the consulting industry; and (2) the troubling role private equity firms are playing in insurance markets.

Force-placed Insurance Let’s start with force-placed insurance.

In many ways, this created a race to the bottom in which both regulators and Wall Street firms were willing participants. At DFS, we hope our activism at the state level will at least sometimes do the reverse and spur a race to the top. Now, some people claim that being a strong and independent regulator is at odds with the goals of promoting economic growth and job creation. That you have to be a laid back or passive regulator to be progrowth and pro-business. We fundamentally disagree. When Governor Cuomo – who himself played a vital role as a financial watchdog when he was Attorney General – proposed creating DFS, he gave us a clear mission. He wanted the industries DFS regulates – banking and insurance – to thrive. He wanted to keep New York the financial capital of the world. And he also wanted to protect consumers and investors better than ever before by using all the tools in our tool-belt. Those two goals can fit together. They are not mutually exclusive. When consumers, entrepreneurs, and investors have confidence in the integrity – the safety and the soundness – of their banks and insurers. When they know they’re getting a fair deal. They’ll do more business here. That’s better for the long-term health of the financial industry and our economy. And it is certainly better for the long-term health of our system to prevent future crises through smart and active regulation.

In October 2011, the New York State Department of Financial Services launched an investigation into the force-placed insurance industry. Force-placed insurance is insurance taken out by a bank – on behalf of the homeowner – when a homeowner does not maintain the insurance required by the terms of a mortgage. This occurs most frequently when a homeowner allows their policy to lapse – usually due to financial hardship. So, these are folks who are already teetering on the edge of financial disaster. And, as the name implies, the insurance is forced upon them. Now, in certain circumstances, this makes sense because the mortgage holder has a right to protect their collateral. (In this case, the house.) But when we conducted our investigation, we found that there was very little competition and very high rates in the forceplaced insurance industry. Sometimes when a homeowner who was already in financial trouble got ‘force-placed’ into an insurance policy their rate jumped 2 to 10 times higher – despite the fact that force-placed insurance provides far less protection for homeowners than voluntary insurance. Our investigation looked at why this was happening. Normally, you’d expect that the bank would do what any of us would do when they shop something. That they’d look for the best product at the lowest price. What we found is that the banks and the insurers had set up

And it’s certainly not pro-business to regulate so lightly that we run the risk of another meltdown. 18 May 6, 2013 / INSURANCE ADVOCATE

continued on page 20

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New York, why can’t you clean it up nationwide.

what is essentially a form of reverse competition.

We’ve received a good response from a number of states so far. But the proof will be in the pudding.

Banks were looking for high prices and high premiums. And they were happy to pay them. Why? Because a good portion of the premiums were being funneled back to the banks in the form of commissions.

If other states follow through, it will help end the kickback culture that has pervaded this industry and hurt far too many homeowners and investors.

Anti-Money Laundering Enforcement All of this, mind you, at the expense of homeowners and investors, who ultimately got stuck with the bill. In May, we held public hearings where we brought the industry and homeowners to testify. And that hearing – along with our broader investigation – really tore the cover off this issue. DFS’s investigation has already produced a recent, major settlement with the country’s largest force-placed insurer: Assurant. Assurant controls 70 percent of the market in New York. That settlement includes restitution for homeowners who were harmed, a $14 million penalty paid to the State of New York, and industry-leading reforms that will save homeowners, taxpayers, and investors millions of dollars going forward through lower rates. Indeed, through those reforms, we’re banning the type of practices that drove premiums sky-high.

Another area where I think DFS has begun to play an important and constructive role is anti-money laundering – which is so vital to our country’s national security. This was an area where we felt that, at times, the industry and our regulatory structures had gotten used to a certain playing field. A certain silently acknowledged level of consequences tied to a certain quantum of illegal and immoral behavior. And we felt that this was serious, serious conduct justifying more potent action. And we wanted the banking industry to take it a lot more seriously given the threat it posed not only to our financial system, but to our national security. Banks were sometimes effectively serving as financial conduits for terrorists, other enemies of our country, and perpetrators of some of the most vile human rights abuses anywhere on earth. DFS took action against a particular bank last summer. We felt like it was the right thing to do.

We’re kicking the kick-backs out of this industry. And we did it based on the facts and the law. Today, we announced an additional settlement with the nation’s second-largest force-placed insurer, QBE, which that includes a $10 million penalty, restitution for homeowners, and New York’s industry-leading reforms. Now, companies representing more than 90 percent of this market in New York have signed onto our reforms.

Our investigation uncovered that the bank had hidden from U.S. and other regulators roughly 60,000 secret transactions involving at least $250 billion – reaping the company hundreds of millions of dollars in fees.

When DFS began its investigation, force-placed insurance wasn’t an area to which many regulators were paying close attention.

This conduct had left the U.S. financial system vulnerable and deprived law enforcement investigators of crucial information used to track all manner of criminal activity, including terrorism.

It was essentially a dirty little secret in the insurance industry. But that’s started to change – at least in part – because DFS has pushed very hard on this issue. Soon after DFS announced its settlement with Assurant, the Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae and Freddie Mac, followed our actions by filing a notice to ban the lucrative fees and commissions paid by insurers to banks on force-placed insurance. To spur further action, DFS also recently urged other state regulators to use our settlement with Assurant as a national model. Every regulator should be asking, “If you can clean up things in 20 May 6, 2013 / INSURANCE ADVOCATE

New York ended up securing a $340 million settlement and a set of reforms to help put a stop to this behavior. Initially, there was what we believed to be a misplaced focus on the fact that DFS had acted more quickly, more robustly, and more independently than some people were used to from a state banking regulator. That focus was misplaced because it distracted everyone from the very real issues at stake when it comes to international money laundering on a massive scale for nations like Iran. continued on page 22

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Ultimately, though, we certainly stimulated a debate nationally and internationally on this issue. And, more importantly, I think we started an alteration or, better yet, a recalibration of the regulatory playing field going forward in this area. Now, you’re seeing more robust action taken – at both the state and federal level – to root out this type of illegal money-laundering That’s good for our national security. And it’s good for the integrity – and the safety and soundness – of the broader financial industry. And it was driven in part by the sort of healthy competition I mentioned earlier.

Consulting Now let me turn to a new set of issues on which DFS is very focused right now. And where we hope, again, to play an essential role in the weeks and months ahead. The independence and integrity of monitors and independent consultants is another area of vital concern to DFS. These consultants are installed at banks and other companies usually after an institution has committed serious regulatory violations or broken the law. The intent is that monitors assist companies in improving controls and ensuring that violations do not reoccur. All too often, however, the outcome of a monitorship is disappointing, as we recently saw in the context of the national mortgage reviews. This can be blamed on a number of factors, but it is worth considering that our current system significantly undermines the independence of the monitors—the monitors are hired by the banks, they’re embedded physically at the banks, they are paid by the banks, and they depend on the banks for future business. If the monitors or consultants are simply puppets of the big banks that pay their fees – rather than independent voices – then their work-product can hardly be deemed reliable. There is also insufficient communication between monitors and regulators. Frequently, monitors never hear from regulators once they are put in place at a bank. This is a problem we can and must fix. It’s largely about “managing the monitors” and that is up to regulators. There need to be regular meetings between regulators and monitors. Expectations must be set. Weekly updates on progress should be happening.

A good monitor can truly improve a troubled company when there is a problem, but an ineffective monitor can make the situation much worse by creating a false sense of security in the regulator and the public. At DFS, we have already instituted a more robust process in the selection of monitors, and we will be pushing more broadly for change in the dynamics between regulators, monitors, and institutions. You will likely be seeing some innovative initiatives from DFS in this area in the coming weeks and months. And we expect that those actions will help propel reform at both the state and federal levels. One very important question we all need to be asking is when monitors or consultants perform poorly or, worse, when they intentionally obscure problems at banks: What should the consequences be? Because if we allow intentional conduct aimed at quietly sweeping problems at banks under the rug, we are truly undermining our whole system of prudential regulation. At some point, we must take action that has real consequences or the problems in our system will continue to be perpetuated rather than deterred.

Private Equity Buying Annuity Companies I’d now like to turn to an emerging trend in the insurance industry that DFS has become concerned about. Private equity firms are becoming active in the acquisition of insurance companies. In the last few years, private equity firms have been targeting fixed and indexed annuity writers. For those who are unfamiliar with annuity companies — they sell insurance products that essentially promise a certain payment every year or month (whatever the terms of the policy may be) over a particular period of time. If you look at the deals completed or announced to date, private equity-controlled insurers now account for nearly 30 percent of the indexed annuity market (up from 7 percent a year ago) and 15 percent of the total fixed annuity market (up from 4 percent a year ago). These are large numbers, and they indicate a very rapid growth in market share. As you may expect, that’s driving DFS to take a close look at these transactions and these firms – to ensure that the safety and soundness of these companies and consumers both remain protected. Now, as you probably know, annuities are very popular products that a significant number of Americans rely on to help finance their retirements. The risk that we’re concerned about at DFS is whether these pricontinued on page 26

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Shadow Insurance

vate equity firms are more short-term focused – when this is a business that’s all about the long haul.

Another area that we’re hard at work on relates to the use of what are called captive insurance companies, used to quietly off-load risk and increase leverage at some of the world’s largest financial firms.

That their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders. And – because of their potential short-term focus – there is a risk that these companies may not be delivering the level of compliance and customer service that we’d expect of them given the importance of this product to so many seniors on fixed incomes. There can be exceptions, but generally private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments. If just a few of these investments work out, then the firm can be very successful – and the failed ventures are just viewed as a cost of doing business. This type of business model isn’t necessarily a natural fit for the insurance business, where a failure can put policyholders at sigifnicant risk. Private equity firms typically manage their investments with a much shorter time horizon — for example, 3-5 years — than is typically required for prudent insurance company management. They may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns. Now, at DFS, we regulate both banks and insurance companies. And the differences between these two industries are quite striking when it comes to private equity investments. Private equity firms rarely acquire control of banks, not because they are prohibited from doing so, but because the regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like. These regulatory requirements in the banking industry are designed – in part – to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game. The long term nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank. We need to ask ourselves whether we need to modernize our regulations to deal with this emerging trend to protect retirees and to protect the financial system. This is an area that not too many regulators are looking at. But it’s one where DFS is moving to ramp up its activity. And we hope that other regulators will soon follow suit. 26 May 6, 2013 / INSURANCE ADVOCATE

In July 2012, the New York State Department of Financial Services initiated a serious investigation into this somewhat obscure area that – we believe – could put insurance policyholders and taxpayers at greater risk. Insurance companies use these captives to shift blocks of insurance policy claims to special entities – often in states outside where the companies are based, or else offshore (e.g., the Cayman Islands) – in order to take advantage of looser reserve and oversight requirements. (Reserves are funds that insurers set aside to pay policyholder claims.) In a typical transaction, an insurance company creates a “captive” insurance subsidiary, which is essentially a shell company owned by the insurer’s parent. The company then “reinsures” a block of existing policy claims through the shell company – and diverts the reserves that it had previously set aside to pay policyholders to other purposes, since the reserve requirements for the captive shell company are typically lower. (Sometimes the parent company even effectively pays a commission to itself from the shell company when the transaction is complete.) However, this financial alchemy, let’s call it ‘shadow insurance,’ does not actually transfer the risk for those insurance policies off the parent company’s books, because in many instances, the parent company is ultimately still on the hook for paying claims if the shell company’s weaker reserves are exhausted (“a parental guarantee”). That means that when the time finally comes for a policyholder to collect their promised benefits after years of paying premiums – such as when there is a death in their family – there is a smaller reserve buffer available at the insurance company to ensure that the policyholders receive the benefits to which they are legally entitled. We believe that shadow insurance also puts the stability of the broader financial system at greater risk. Indeed, in a number of ways, shadow insurance is reminiscent of certain practices used in the run-up to the financial crisis, such as issuing subprime mortgage-backed securities (MBS) through structured investment vehicles (“SIVs”) and writing credit default swaps on higher-risk MBS. Those practices were used to water down capital buffers, as well as temporarily boost quarterly profits and stock prices at numerous financial institutions. And ultimately, those practices left those very same companies on the hook for hundreds of billions of dollars in losses from risks hidden in the shadows, and led to a multi-trillion dollar taxpayer bailout.

continued on page 28

IN THE MATTER OF THE LIQUIDATION OF CAPITAL MUTUAL INSURANCE COMPANY Supreme Court County of New York Index No.: 402044/2000 NOTICE Pursuant to an order of the Supreme Court of the State of New York, County of New York (“Court”), entered on October 5, 2000 (“Liquidation Order”), the thenSuperintendent of Insurance of the State of New York and his successors in office were appointed as liquidator (“Liquidator”) of Capital Mutual Insurance Company (“Capital Mutual”) and, as such, has been directed to take possession of Capital Mutual’s property, liquidate its business and affairs, and dissolve its corporate charter pursuant to Article 74 of the New York Insurance Law (“Insurance Law”). The Superintendent of Financial Services of the State of New York has now succeeded the Superintendent of Insurance as Liquidator of Capital Mutual. The Liquidator has, pursuant to Insurance Law Article 74, appointed Michael J. Casey, Acting Special Deputy Superintendent (“Acting Special Deputy”), as his agent to liquidate the business of Capital Mutual. The Acting Special Deputy carries out his duties through the New York Liquidation Bureau, 110 William Street, New York, New York 10038. PLEASE TAKE NOTICE that the Supreme Court of the State of New York, County of New York, has issued an order, dated March 29, 2013, establishing April 15, 2013, as the bar date for presentment to the Liquidator of all claims against Capital Mutual or its insureds other than the Liquidator’s claims for administrative costs and expenses. Requests for further information should be directed to the New York Liquidation Bureau, Creditor and Ancillary Operations Division, at (212) 341-6665. Dated: April 2, 2013

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INSURANCE ADVOCATE / May 6, 2013 27

[ COVER ] continued from page 26

Similarly, shadow insurance could leave insurance companies less able to deal with losses. The events at AIG’s Financial Products unit in the lead up to the financial crisis demonstrate that regulators must remain vigilant about potential threats lurking in unexpected business lines and at more weakly capitalized subsidiaries within a holding company system. We are hard at work on our continuing investigation into shadow insurance. And we hope to shed light on and further stimulate a national debate on this important issue to our financial system.

Conclusion Now, I’ve highlighted a number of areas where DFS has taken a leadership role and sought to push reform. But the role of state regulators can and should vary based on the particular context. It really comes down to a question of federalism – the relationship between the states and the federal government. What I will call collaborative or cooperative federalism is usually the best kind of federalism. When we work closely and together and symbiotically with our federal partners. A great example of this is what DFS has been doing to partner with the Consumer Financial Protection Bureau (CFPB) in the areas of debt collectors and payday lending. In other areas, where there has been less focus on a particular issue at the federal level, a form of persuasive federalism sometimes emerges – where the state tries to lead by example and stimulate national reform. DFS’s work in the force-placed insurance industry is a great example.

Change is good. And a robust marketplace of ideas among financial regulators is a key strength of our system. Indeed, our federal regulators are leading on a number of important issues. Today, the Federal Reserve and Treasury – for example – are leading the charge on two areas of vital concern to long-term financial stability: money market reform and addressing potential sources of risk in the tri-party repo market. The SEC – together with its law enforcement partners – has fought hard to crack down on insider trading. And the SEC is also working to modernize investor disclosures in an era of Twitter, Facebook, and other social media products that didn’t even exist a decade ago. The Commodities Futures Trading Commission (CFTC) has taken a leadership role in cracking down on past abuses in LIBOR and proposing future reforms so that they don’t happen again. The CFPB – led by Richard Cordray, who is just one of the bright, shining stars of the Obama Administration – has staked out new ground in the fight to arm families with the clear, concise information they need to make the financial choices that are best for them. In recent years, the FDIC has really been ahead of the curve on the issues of providing relief to struggling homeowners and ensuring banks have the capital they need to withstand unexpected financial shocks and losses. The critical point is that through healthy competition – in this marketplace of ideas – the best ideas will hopefully rise to the top.

On the far end of the spectrum is what I’ll call, for lack of a better term, coercive federalism.

That the ideas that withstand the informed scrutiny of fellow regulators, the media, the public, and other stakeholders will one day win out. (Even if it’s not today.) And that those ideas come out better for being battle tested.

Coercive federalism should be rare. But sometimes it’s necessary. Sometimes a state must act alone to change the rules of the game. DFS’s work on anti-money-laundering enforcement is a good example here.

I think our financial system, our economy, and our country will ultimately be better for it. When regulators speak their mind, say their peace, and engage in a vigorous debate through healthy competition.

Now, I listed three types of federalism. But if I had to give them an overarching label, I would call DFS’s overall approach going forward catalytic federalism.

Thank you. And I look forward to taking your questions.

We will continue to evaluate the appropriate role of the state regulator on an issue by issue basis, depending on the context. As I noted at the beginning of the speech, we inhabit a constantly evolving financial ecosystem. And we will remain nimble and agile as we attempt to affect change wherever our everchanging markets need that stimulus. 28 May 6, 2013 / INSURANCE ADVOCATE

The critical point is that through healthy competition – in this marketplace of ideas – the best ideas will hopefully rise to the top.

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[ ON THE LEVEL ]

By Jamie Deapo

The Time is Now!

emographics, technology and advertising threaten the future of independent agents and brokers. As the client base ages and evolves their expectations, demands and buying patterns are changing as well. It’s influenced by the information consumers can obtain

is the right way to buy protection. Consumers need to be educated on exactly what they are buying and the importance of it. Agents need to stress the knowledge, expertise and support they provide clients who have been involved in a loss. Be candid letting them know when they pur-

Agent’s primary objective needs to be educating consumers on the importance of selecting the best protection for themselves, their family and their business. Let them know that you always provide the most competitive price possible. The key is to get the best protection and value you can for the insurance premium you pay. Jamie Deapo

on the internet. The internet also offers 24/7 access for pricing and purchasing insurance. At the same time an enormous amount of advertising is designed to convince consumers that price should be the major influencer in buying insurance. These ads also encourage consumers to cut out the middle man and buy direct from the carrier, who is available anytime you want to buy and for the lowest price possible. If independent agents are to remain a significant player in the insurance marketplace they must change how they operate. Recent surveys show that although consumers frequently get pricing and information about insurance on the internet they want to deal with someone they know, like and trust when it comes to purchasing. Agents need to seize on this and reinforce the idea that having someone watching out for what is in the consumer's best interest

Is your advertising looking a little dull and unnoticable? 30 May 6, 2013 / INSURANCE ADVOCATE

chase coverage direct from an insurance company there will be no one to make sure that they receive everything they're entitled to and in a timely manner. The New York Department of Financial Services offers many consumer protections however unless they know and understand what they are and how to have them enforced they won't do consumers much good. Agent’s primary objective needs to be educating consumers on the importance of selecting the best protection for themselves, their family and their business. Let them know that you always provide the most competitive price possible. The key is to get the best protection and value you can for the insurance premium you pay. Consumers believe the advertising they are bombarded with for 3 reasons: 1. No one likes paying for insurance so the less they have to pay the better they like it.

2. They don't ever picture themselves being involved in a serious loss. That's something that will happen to somebody else but not to them. 3. They don't understand and appreciate the value of having the proper protection provided and serviced by a professional insurance agent. Sadly some independent agents and brokers help to perpetuate the lowest price myth. They operate as order takers, not offering personalized insurance protection but instead playing the lowest price game promoted by the direct response online insurers. Technology has made it highly cost effective for direct response carriers to write large volumes of consumers very inexpensively. They place the responsibility for deciding what coverage is appropriate and adequate on the consumer. Unfortunately most consumers don't have the level of knowledge to know what coverage to choose and many put themselves at risk. If independent agents and brokers are going to solidify and grow their market share they must educate consumers on the complexity of coverage and the need to have solid professional advice on what coverage to carry. They should not be afraid to expose the danger of consumers making coverage decisions without the professional advice provided by a knowlegable and professional agent or broker. It's also important for agents and brokers to get consumers to realize that no one knows who will be involved in a serious accident or loss. It’s very possible they could be the victims. They only have to look at the recent natural and manmade catastrophes for examples of this. The most

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effective way to buy insurance is having personalized protection recommended by an insurance professional they like and trust and who provides excellent service including support in handling a claim. Good agents know that they must offer that protection and service at a competitive premium. In order to have the time to spend with consumers developing their protection package and providing it at a competitive premium based on value requires maximizing technology in your agency. Workflows need to be streamlined and automated. The goal is to provide your staff dealing with clients and prospects the maximum amount of time to work with them. Social media, digital marketing, a dynamic and constantly evolving website as well as an informative blog are all critical in reaching the diverse groups of consumers looking for insurance protection. Itâ&#x20AC;&#x2122;s important to be seen and recognized as a professional and expert by the internet community as well as the community you

In order to have the time to spend with consumers developing their protection package and providing it at a competitive premium based on value requires maximizing technology in your agency. Workflows need to be streamlined and automated. The goal is to provide your staff dealing with clients and prospects the maximum amount of time to work with them. interact with face-to-face. You must be also be accessible to clients and prospects when they want and need information, advice and service. This may mean changes in your operation or obtaining outside support services when you are not available. In todayâ&#x20AC;&#x2122;s environ-

ment itâ&#x20AC;&#x2122;s not business as usual. Consumers want instant service and they want it when it is convenient for them. If you donâ&#x20AC;&#x2122;t provide it they will find someone that will. None of what I have written in this column is new. Much of it I have touched upon in past articles and classes I teach. Some of you are probably tired of hearing me mention it. The problem is time is of the essence and agents have to commit to doing these things or they will continue to lose business to direct response carriers. I firmly believe in the value of the independent agency system. I also believe that given good information about the benefits of buying from an independent agent, consumers will see the value as well. The key is making sure consumers are given all the facts and understand all the pitfalls. No one will deny that it is hard work yet anything worthwhile is. I would hope that most agencies rise to the challenge because it will magnify the messages consumers see and hear. Iâ&#x20AC;&#x2122;m confident that those agencies that do make these changes will see positive results. The key is making it a regular part of your agency operations and focusing on it every day. [IA]

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[ FACE TO FACE ]

By Michael Loguercio

One From Column “A”

o my son Devin, who is a member of the NY Young Insurance Professionals and whom many of you know, tells me the other day that he is writing a paper for his junior year economics class at the University of Hartford, on counterfeit auto parts manufactured in China that find their way into our vehicles, and the ramifications that affect everything from insurance premiums to the job market. Finding this to be a very interesting topic, I asked him if I could please read it. Well, a few Michael Loguercio lines into his paper, I realized that this is something that would be very interesting to the readers of my column, so I asked Devin if I could share it with you, and of course he was honored to do so (he had no choice or I would have cut off his laundry money at the dorm). The following is what Devin presented to his professor:

The Counterfeiting of Automobile Parts in China By Devin Loguercio When discussing the violation of intellectual property and counterfeit goods, many consumers consider only the falsification of Veblen commodities. In actuality, Veblen goods account for only thirteen percent of all counterfeit products (Government, 2013). The remaining eighty seven percent are counterfeited consumer goods. By definition, counterfeit consumer goods are tangible goods produced as a response to the consumers’ wants and needs and which thusly infringe upon the rights of trademarks and copyright laws (Britannica, 2013). These consumer supplies are anything from sneakers, to cigarettes, to pharmaceuticals. As the mid-2000s (2002 to 2006) came, there was a sudden surge of counterfeit auto parts emerging from the Far East; most notably the People’s Republic of China. Counterfeit auto parts can turn out to be some of most dangerous com34 May 6, 2013 / INSURANCE ADVOCATE

modities to counterfeit. Aside from the economic impacts or harming legitimate companies, these parts are not tested or regulated properly. They can cause serious injury or even death due to failure or poor performance. Although the Chinese government has made attempts to shut down such counterfeiting operations, they continue to exist, causing more than just monetary tribulations worldwide. China alone produced nearly eighty three percent of the counterfeit auto parts sold worldwide in 2011 (Bowman, 2011), making the current counterfeit situation in the Chinese market one of the worst in the world. The manufacturing of auto parts industry is a multibillion dollar market opportunity; one in which over 1,200 businesses compete in, with an annual revenue reaching fifty three billion dollars and a one percent annual growth rate (Auto Parts Manufacturing in the US: Market Research Report, 2013). The main purpose of counterfeiting a good is to turn a profit, so in a multibillion dollar industry there are obviously going to be counterfeit goods entering the market. When these counterfeit parts are sold in major markets, they are sold, on average, at twenty to thirty percent cheaper than the real auto part. Consumers are more inclined to go with this cheaper option, thus causing demand levels for auto parts to change. With the change in these demand levels for automobile parts many manufactures are working overtime to advance and increase their output into this extremely competitive market. Although these legitimate manufacturers attempt to sell at competing prices, the counterfeit parts will always be sold at a cheaper margin. Legitimate auto part manufacturers must undergo a series of tests and use high grade material to ensure the public and their consumers that their part is safe to use, and also that it will work one hundred percent of the time. Conversely, the counterfeit industry does not. These counterfeit manufacturers will push out parts in bulk without the proper tests or even proper material. They will substitute cheap materials in place of higher grade metals, brand the part with a legitimate company’s logo, and sell the part under that company’s name. Therefore, when a consumer or third party repair shop goes to buy

a certain part, they search for what brand they want and purchase a supposedly “legitimate” part at a great price. This act, whether the consumer knowingly purchased a fake brand name part or not, has caused a loss of a near $700 billion to legitimate auto manufacturers (George, 2011). Even with this major loss in revenue, the prices of legitimate car parts are still higher than counterfeit ones, causing repair shops to look around and search for the best price. When the auto body repair shops seek to purchase a product at a particular price, they seek out a jobber, or wholesaler. These jobbers browse the market for the particular part at the right price. The issue presented here is that due to the large influx of counterfeit parts, all with the “proper” trademarks, the jobbers do not know which goods are forged or not. These jobbers purchase the cheaper parts and sell them to the auto body shops, not knowing the part is counterfeit. Seeing as it is extremely difficult to differentiate between the real and counterfeit parts, the auto shops as well as the consumers are unaware of the potential dangers that this one part possesses. Forged auto parts are not made with the same detail and precision as their original counterparts. They are not inspected nor tested to show if they work. Their only purpose is to turn a profit. Therefore there is no possible way to tell if the part will work once installed. This can lead to a series of extremely dangerous events which could in turn end with not only affecting consumers in a monetary state, but with the loss of human life. On October 10th, 2012, the United States Federal Government warned consumers about a sudden influx of faulty airbags. The National Highway Traffic Safety Administration released a statement saying that anyone who replaced their airbags within the past three years are in danger of having counterfeit airbags installed into their car. These airbags are the exact same dimensions and color as the originals and even display the correct manufacturers logo and markings. The United States government estimated that over 10,000 fake airbags have been installed into vehicles across the country (Press, 2012). These fake airbags have been tested by the NHTSA and reported that those airbags do not deploy properly or at all and do not continued on page 36

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[ FAC E TO FACE ] continued from page 34

inflate properly. There have even been reports that on the rare occasion these airbags deploy at random with enough force to send shards of plastic and debris into the driver and passengers face and eyes. The NHTSA with the help of police forces made a move to begin confiscating fake airbags from consumers. In August of 2012, these moves lead to 1,600 counterfeit airbags being seized in a North Carolina body shop who knowingly sold counterfeit airbags purchased from a plant in China (Beconcini, 2013). In the first nine months of operation, United States Immigration and Customs Enforcement seized 3,000 counterfeit airbags. These counterfeit airbags are extremely dangerous. When they fail to deploy or deploy prematurely those involved will not only be faced with a safety issue, but these consumers will be faced with an economic concern as well. Under the assumption the driver is in an accident and the air bags do not deploy, statistically, he will be harmed much greater than one whose air bags did deploy. The consumer will face a higher medical bill, which in turn will increase the cost of his insurance premium or even loss of their insurance completely. This premium increases and part failures are not only affecting those consumers directly involved in the accident, these counterfeit parts affect everyone as a whole. When the insurance companies begin paying out multiple claims due to the fake auto parts failing in multiple cases, they will start requiring a higher premium from every client in order to meet their net profit value. Although those consumers who were in the accident will be paying a higher premium to make up the difference, it still affects the other consumers economically because the insurance companies have to ensure that their net present value remains even. While there is no way for these companies to predict whether or not someone will become involved in an automobile accident or which cars are equipped with counterfeit parts, the insurance companies have to look out for their bottom line; which includes a higher premium cost for car insurance for most, if not all, consumers. These counterfeit parts are not affecting only the American and Chinese markets. The United Arab Emirates (UAE) have projected that the counterfeit auto parts make up an alarming rate of twenty-five percent of the total auto parts in the market and 36 May 6, 2013 / INSURANCE ADVOCATE

account for nearly sixty nine percent of all counterfeit goods within the United Arab Emirates (George, 2011). The UAE conducted a series of raids in an attempt to seize the counterfeit auto parts. Over ten days, the UAE raided twenty seven different auto body shops and seized over 30,000 pieces of counterfeit parts. Some of these parts were branded with major car companies, such as the Toyota Motor Company. Hatem Ghani, Director of IP Enforcement in Al Shaali and Co., Advocates and Legal Consultants has been conducting raids since 2008 in order to reduce the market for counterfeit goods. Director Ghani gave a statement stating that; “The exact counterfeit market cannot be defined, as the authorities usually act upon requests from Car brands and not all brands are similarly active.” (George, 2011). These counterfeit parts, sold under a brand name, are the cause for more than fifty percent of all accidents in Saudi Arabia. Even with all the raids, it is near impossible to shut down these operations. With the help of the United Arab Emirates and the European Union, the United States government has begun urging auto brands to confront the Chinese government about their intellectual property infringement. The Chinese, according to reports, lack the political force to overcome these violations. The central government in Beijing has gone forward to try and improve intellectual property rights and combat counterfeiting rings. Due to China’s large size however, it has become nearly impossible to regulate all provinces. The local police force, trademark enforcement officials and magistrates of each province are appointed by the local government, not the central government. These provinces each possess their own economic concerns which is some cases differ from the central governments’. Many counterfeiting rings, although involved in illegal and in many cases criminal activity, purchase and set up legal entities within their region of China. These businesses were started with the capital gained from the counterfeiting operations, but follow the law and regulations set down by the central government of China and the local government of the province. This poses a major problem for the Trademark Enforcement officials due to the fact that these companies help out the citizens of the province and the local government. In many cases the local government has even invested in business where counterfeiting is

the main operation, or was the source of the capital gained (Beconcini, 2013). Therefore, these local municipalities are very reluctant to shut down the counterfeit operations because they provide their own method of economic reform and in essence contribute more to their province than the central government does. With all the attempts made by the central government of China, there is still a constant game of cat and mouse in the attempt to shut down these operations and catch those involved. According to Supplier Business, on March 12th, 2012, the Chinese government underwent one of the largest counterfeit raids in China. It resulted in two people, the counterfeit ring leaders, being sentenced to one year in prison, one year probation and a fine (Goldsberry, 2012). The issue here is that the punishment is not enough deterrent for these rings. With the amount of revenue these counterfeiters pull in, paying the fine is not a problem and the year in jail can easily be served or overturned due to bribery. This raid will have no effect on the counterfeiting operations in China. With the government attempts made to regulate export of counterfeit goods or raid known operations, these counterfeit rings remain one step ahead of the central government. These counterfeiting rings will close or will be shut down by the government, only to reopen directly after. These rings own a series of factories and business, all with different names and in different locations. Thus when one operation is shut down they move to a different location with a different name and continue as if nothing happened. The lack of proper control and enforcement in China has begun to create a shadow of a doubt in many auto parts manufacturers. These companies are beginning to realize that there is no way to fully protect their intellectual property and trademarked parts, thus forcing them to retreat from the market. The pull out of the corporations causes a major economic back lash within the Chinese market. Not only does the Chinese market lose out on the economic benefits of particular companies, this constant counterfeiting issue and lack of enforcement has cause many countries and trade organizations to cast dispersions upon the Chinese market and government, forcing them to remain apart from the East Asian market. The violation of intellectual property on auto parts is an issue that affects every consumer in society. With the sudden surge of

[ FAC E TO FACE ] counterfeit auto parts emerging from the Peopleâ&#x20AC;&#x2122;s Republic of China, foreign governments have made numerous attempts in order to control the import of forged automobile parts. These counterfeit auto parts have turned out to be some of most dangerous commodities that can be counterfeited, and possess both economic issues and issues of safety to the general public. Although the Chinese government has made the attempt to shut down such operations, these counterfeiting rings remain steps ahead by reopening business directly after they are shut down. In an attempt to regulate the flow of these counterfeit goods, the United States Customs Enforcement and United Arab Emirates have launched a series of raids across the United States and Saudi Arabia, attempting to confiscate the forged goods and shut down the home front operations. Although these actions have proven successful, they still bring up the question of what impact will this have on the counterfeiters operating in China and if they will ever cease to exist. Due to the large monetary opportunity presented and lack of enforcement by the Chinese government, the counterfeiting of automobile parts will continue to be an issue while consumers worldwide face threats to of bodily harm and economic tribulations.

rates247: http://www.emirates247.com/business/economy-finance/25-auto-partsare-counterfeit-2011-09-28-1.421095 Goldsberry, C. (2012, March 23). Fake auto parts are big business for counterfeiters. Retrieved from Automotive/Mobility: http://www.plastics today.com/blogs/fake-auto-parts-arebig-business-counterfeiters Government, U. (2013, April 22). U.S Cus-

toms and Border Protection. Retrieved from U.S Customs and Border Protection: http://www.cbp.gov/xp/ cgov/home.xml Press, A. (2012, October 10). Feds to warn of counterfeit replacement air bags: auto execs. Retrieved from CBSnews: http://www.cbsnews.com/ 8301201_162-57529308/feds-to-warn-ofcounterfeit-replacement-air-bags-auto continued on page 38

Bibliography Auto Parts Manufacturing in the US: Market Research Report. (2013). Retrieved from IBIS World: http://www.ibisworld.com/industry/de fault.aspx?indid=837 Beconcini, D. P. (2013, January 03). Auto Brands Must Confront Counterfeiting in China. Retrieved from Automotive World: http://www.automotiveworld.com/co mment/auto-brands-must-confrontcounterfeiting-in-china/ Bowman, Z. (2011, February 16th). Report: Counterfeit parts overwhelm China; include fake airbags, oil seals. Retrieved from Autoblog: http://www.autoblog.com/2011/02/16/ report-counterfeit-parts-overwhelmchina-include-fake-airbags/ Britannica, E. (2013, April 22). Consumer good. Retrieved from Encyclopedia: http://www.britannica.com/EBchecke d/topic/134546/consumer-good George, J. (2011, September 28). 25% auto parts counterfeit. Retrieved from EmiINSURANCE ADVOCATE / May 6, 2013 37

[ FAC E TO FACE ] continued from page 37

-execs/ Thank you, Devin, for allowing me to share this in my column…for every person who tells me that they enjoyed reading it, I’ll throw in an extra buck for laundry this month! This past week The Insurance Club of Buffalo, which is celebrating their 60th anniversary this year, held their renowned Buffalo I Day Conference at the Buffalo Convention Center in Buffalo, NY. I Day attendees were greeted by a 1950’s theme, along with a bright red 1953 Cadillac Convertible in the registration area, and pretty girls in bobby socks and 50’s style dresses…just like Mom used to wear! There were over 1400 attendees, and 120 Exhibitors, representing companies, wholesalers, finance companies, and a wide array of insurance related services. The morning CE session, “Compete, Counsel and Comply: Taking Care of Client’s needs while playing by the rules” was extremely well attended and many in attendance enthusiastically commented on the excellent presentation by Tim Dodge and Jamie Deapo of IIABNY (Jamie is also a friend of mine and a regular contributor to the Insurance Advocate, whose column I always read…right after reading mine!). The luncheon keynote speaker was Rudy Giuliani, 107th Mayor of New York City. Those of you who have heard Rudy speak, know that his remarks are always poignant, right to the point, and presented in a confident and well thought out manner. As always he was charismatic, and I even detected what sounded to me like a test balloon for a possible run again in 2016…we shall see! Overall, another total success by The Insurance Club of Buffalo! Congratulations to the “Presidential Triumvirate”: Dawn Caci of Travelers, Joe Floss of The Floss Agency, Dave Pietrowski of LoVullo & Associates, and the entire Board of Directors of the Insurance Club of Buffalo. But wait, there’s more! I would be remiss if I did not mention a friend to me and the entire insurance industry in NY, Tony Kubera of Russell Bond who was our Emcee for the event…great job Tony! Well, that’s what’s happening around town, and until next time, “Ciao for now!” 38 May 6, 2013 / INSURANCE ADVOCATE

RUDY GIULIANI 107TH MAYOR OF NEW YORK CITY SPEAKING AT BUFFALO IDAY 2013 Michael Loguercio is the Regional Sales Manager for EZLynx; and has been active in the insurance industry since 1978 as an insurance technology professional and a licensed insurance broker. He is an active Past President of the Young Insurance Professionals of New York State, current ACT/AUGIE, Professional Insurance Agents of New York State, Independent Insurance Agents and Brokers of New York State, and Council of Insurance Brokers of Greater New York committee member. In 2012 Michael was honored with a NYYIP/PIA Lifetime Achievement award; and in 2010 with the NY-YIP/PIA Insurance Professional of the Year award. Michael is also Chair of the 2013 Professional Insurance Agents Regional Awareness Program on Long Island. In his community, Michael is President of the Longwood Central School District Board of Education on Long Island, NY; is a Director on the board of REFIT NY (Reform Educational Financing Inequities) and is a member of The Middle Island, NY, Rotary Club and Central Brookhaven Lion’s Club. In 2013 he was awarded the SCOPE Community Service Award for his dedication to his community. Michael is a regular Contributor to the Insurance Advocate since 2008, and may be contacted at 631-345-9359 or michael.loguercio@ezlynx.com.You may also follow him on Twitter @MLoguercioJr; and on Facebook @ Michael Anthony Loguercio Jr.

[ FAC E TO FACE ]

DAVE GELIA, DEBBIE HESS AND BARB SHEVLIN

AROUND THE CONFERENCE AT BUFFALO IDAY

ALAN PLAFKER OF MEMBER BROKERAGE WITH RUDY GIULIANI

DAVID LANDE OF CENTURY INSURANCE WITH RUDY GIULIANI

JENNIFER BERGER OF LANCER INSURANCE COMPANY AND RUDY GIULIANI INSURANCE ADVOCATE / May 6, 2013 39

[ IN THE NEWS ]

Tapco Underwriters Expands Western Presence Retail Agents in Arizona, Colorado, and Oklahoma Can Now Quote Coverage in Simple, Five-Minute Phone Call

URLINGTON, N.C.—TAPCO Underwriters, Inc. (TAPCO), a Burlington, N.C.-based MGA specializing in high-volume, middle-market excess and surplus insurance lines,

announced today that the company’s revolutionary service model is now available to retail agents in Arizona, Colorado, and Oklahoma. TAPCO has pioneered the ability to electronically generate, deliver and

Artisan Contractors coverage in a five-minute phone call. Call. Quote. Bind. Using TAPCO’s courteous and prompt call center, Artisan Contractors coverage can be quoted, bound and delivered to your e-mail inbox quickly and accurately during one five-minute phone call. CGL Coverage Available: • Primary limits up to $3 million Occurrence/Aggregate • Excess or Umbrella limits up to $5 million • Ask about these special coverages also available: ■ $5,000 Medical Payments Coverage ■ Additional Interests—Blanket Coverage when required by contract, written agreement, or written permit for ongoing operations ■ Primary and Noncontributory Wording— Applicable to additional insureds under CG 20 33 ■ Waiver of Subrogation—Blanket Coverage included per prior written agreement ■ Per Project Aggregate

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• “A”-rated non-admitted carrier • Competitive pricing • Fast policy turnaround • In-house financing available • Quick claims handling • $10 credit to your personalized TAPCO EZ Bucks Visa debit card with each policy • Visa, MasterCard and ACH payments accepted

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40 May 6, 2013 / INSURANCE ADVOCATE

877-743-6977 www.gotapco.com

archive quotes, binders, policies and endorsements, which allows for coverage to be bound within minutes. TAPCO President Tap Johnson, III made the announcement. TAPCO initiated an aggressive national growth plan in 2007 when they had a territory of eight states – Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia and Washington, D.C – and have since expanded to a total of 29 states, which includes California, Delaware, New Jersey, Ohio, Oregon, Pennsylvania, Texas, Washington, Mississippi, Alabama, Louisiana, New York and now Arizona, Colorado, and Oklahoma. “We have always strived to deliver timely and responsive service to agents and their insured,” says Johnson. “Having created a service model that provides immediacy without sacrificing accuracy is ground-breaking in this industry and we know that folks in Arizona, Colorado, and Oklahoma will be thrilled to have access to such a fast and stress-free system to obtain quotes and bind coverage.” TAPCO has the binding authority for more than 1,000 classes of business, including all types of General Liability; General, Specialty and Artisan Contractors; Property; Vacant Property and Builder’s Risk; Dwelling/Homeowners; miscellaneous Professional and D&O; Liquor Liability; and Personal Umbrella among other lines. An actual quote with the entire E&S binding authority market, application(s), finance agreement(s) and terrorism forms are generated as PDF documents and e-mailed to the agents before they hang up their phones, allowing the agent to review the quote and application with the insured while they talk. Changes can be made in a matter of minutes, and a revised quote can again be sent electronically to the agents. Coverage can then be bound in that same five-minute phone call before the insured walks out of the agent’s office. “In addition to the ‘real time’ benefits TAPCO provides, we make certain that

[ IN THE NEWS ] “We have always strived to deliver timely and responsive service to agents and their insured. Having created a service model that provides immediacy without sacrificing accuracy is ground-breaking in this industry…” – Tap Johnson, III President TAPCO

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each agent and insured who calls us is given exceptional customer service by one of our helpful and knowledgeable underwriters,” says Johnson. “At TAPCO, we can guarantee that each quote has been compared against every market we represent and will be accurate every time.” [IA] TAPCO was founded in 1983 in Burlington, N.C., by Tapley O. Johnson Jr., and specializes in the timely placement of Excess & Surplus lines business for both commercial and personal lines insurance accounts. TAPCO has in-house binding authority to write more than 1,000 classes of business, through A-rated carriers for a wide range of risks, including all types of Property; General Liability; Inland Marine; Dwelling and Homeowners; miscellaneous Professional and D&O; Vacant and Builder’s Risk; Liquor Liability; and General, Specialty, and Artisan Contractors; Personal Umbrella, and other lines. Thecompany began with just three people but has since grown to five offices that employ 200 people, service 8,000 agencies and currently write in 29 states with a goal to be in all 50 in two years. For more information about TAPCO or to receive an instant quote, please call 1-800-334-5579, or visit www.gotapco.com.

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Combined PL/GL Form to Cover Professional & BI/PD - Duty to Defend Form; - Bilateral Tail Options; - Incident Sensitive Trigger; - Coverage for Acts While Involved in a Joint Venture; - Disciplinary Proceeding Supplementary Payments ($500 day/up to $10,000); - Subpoena Expense Supplementary Payments ($500 day/up to $10,000); - Project Specific Coverage Available.

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[ IN THE ASSOCIATIONS ]

PIANY “Wires” Con Ed re: Sandy Slaims

IANY board member and past President Martin Koles has had the Association request a copy of the “failure sequence report” from Consolidated Edison to determine if Sandy utility interruption claims should be paid. According to PIANY, they will follow up aggressively in light of certain facts that may result in relief for consumaers. During Sandy, an explosion at a substation belonging to New York utility company ConEd rocked Manhattan’s East Village at approximately 9 p.m. The blast occurred on 14th Street near the bank of the East River and plunged much of lower Manhattan into darkness as Sandy battered the city with winds and tidal surges. Koles told a recent Assembly hearing (see our last issue) that, “The reason [business interruption claims were not paid by insurance companies] often cited is Consolidated Edison’s report that the cause of the power outage was a flood at the 13th

42 May 6, 2013 / INSURANCE ADVOCATE

Street substation. According to the news reports and videos, there were explosions at the 13th Street substation. If some of the businesses lost power due to these explosions before ConEd pre-emptively shut down the system to preserve its integrity, some of these businesses may be entitled to obtain claim payments under their policies.” According to Koles’ testimony, CP 15 45 Utility Service Time Element provides coverage for business income and extra expense to a suspension of operations at the premises caused by an interruption in utility service resulting from a direct physical loss or damage by a covered cause of loss. CP 10 30 Causes of Loss–Special Form, however, excludes water (flood). But if the water results in fire, explosion or sprinkler leakage, the policy states that it will pay for the loss or damage caused by that fire, explosion or sprinkler leakage. Subsequently, Gov. Andrew Cuomo issued the following statement: "This

administration is fully committed to protecting ratepayers, especially after the utilities' lackluster performance before, during, and after Superstorm Sandy. No ratepayer should pay a single penny for bonuses given to senior utility executives, especially for bonuses awarded for their performance during Sandy. I anticipate Con Ed will fully cooperate with the PSC review." And then a later statement following up:“In light of the ongoing Moreland Commission investigation into utility performance in the aftermath of Superstorm Sandy, I have asked Con Edison to freeze the remaining executive bonuses until the Public Service Commission review is complete. I also urge Con Ed to fully cooperate with the Public Service Commission’s review so we can ensure ratepayers are protected.” Kudos to Martin Koles for the insight. You may download a copy of the letter at http://www.pia.org/COMM/misc/LtrtoBurk eConEdison4-29-13.pdf [IA]

[ FORE WORD ]

[ CLASSIFIEDS ]

continued from page 4

Everyone else was doing it. Men: 56 percent Women: 44 percent I’m having an emergency situation in my car. (For instance, spilled a hot drink on your lap.) Men: 67 percent Women: 33 percent I missed my turn/exit. Men: 54 percent Women: 46 percent I had to go to the bathroom. Men: 35 percent Women: 65 percent I didn’t do anything dangerous. Men: 71 percent Women: 29 percent I was on my way to an emergency. (For example, to help someone who is ill or injured.) Men: 55 percent Women: 45 percent

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My GPS said it was the right thing to do. Men: 82 percent Women: 18 percent I'm just helping out. I wasn't even supposed to be driving. (For example, your friend is intoxicated.) Men: 90 percent Women: 10 percent “In the end, the excuses don’t matter. Your driving record doesn’t have asterisks and footnotes,” said Megna.

Tips for traffic stops

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If you are pulled over, no matter what your excuse is, here’s what to do: 1. Acknowledge the officer’s presence by turning on the right turn signal. 2. Move your vehicle to the right shoulder of the road as soon as it is safe to do so. 3. Turn on your hazard lights. 4. Turn off your radio. Do not make a phone call. 5. Remain inside your vehicle. 6. Place your hands in clear view; for example, on your steering wheel. If you wind up getting a ticket, you may pay more for car insurance when your insurer runs your next DMV report. Insurance.com’s Uh-Oh! Calculator will tell you the average rate increases for 14 common traffic violations. See the full "Ticketmasters" article at http://www.insurance.com/auto-insurance/safety/traffic-ticket-excuses.html [IA]

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[ CRACK DOWN ]

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By Betty Flood and Katlin Nash

Fraudulent Out-of-State Vehicle Registration Crackdown

LBANY, N.Y.—The New York Stand Against Insurance Fraud endorsed a measure for the crackdown on rate evasion insurance fraud. New York State Senator Lee Zeldin (R, C, I- Shirley) has called for a crackdown on rampant auto insurance fraud being committed by New Yorkers who intentionally and illegally register their vehicles out of state to take advantage of lower auto insurance rates. The sponsors of the bill include Independent Democratic Conference Leader Jeffrey Klein (D, WF, I-Bronx), Senator David Carlucci (D, WFRockland), Senator Ted O’Brien (DMonroe), Senator Diane Savino (D, WF, I-Kings), Senator Daniel Squadron (D, WF-Kings), Senator Toby Ann Stavisky (D, WF, I-Queens), and Senator David Valesky (D, WF, I-Madison). The purpose of the bill is to reduce the incidence of auto insurance fraud including fraud committed by those who misrepresent where they live, operate their automobile, and garage their vehicle for insurance coverage purposes. “By misrepresenting where their automobile operators truly live and operate their motor vehicle, these people obtain inappropriate reductions in their auto insurance premium rates and these costs are shifted to other law abiding automobile owners,” said Senator Zeldin. The practice of rate evasion creates a double deficit by stealing legitimate revenues from registration fees and sales and use taxes due to the state where the vehicle actually resides and denies the insurance carrier its legitimate premium to cover the greater risk in that location. According to the State Commission on Investigation, millions of dollars are lost in the state and municipal revenue every year. The comprehensive legislation would grant the Superintendent of Insurance the authority to investigate fraudulent activity, provide rewards of up to $5,000 to anyone who provides information leading to the conviction of a rate evader and bumps up the severity of the violations connected to this practice. “Rate evasion is an illegal and costly

scam that drives up insurance premiums for honest car owners and causes the state to lose out on precious revenues,” said Senator Zeldin. “This is a particular problem in areas like Long Island and New York City where we pay some of the highest insurances rates already.” “New Yorkers Stand Against Insurance Fraud is pleased to have Senator Zeldin’s strong support on this issue,” said NYSAIF spokesman David Schwartz. Estimates show that rate evasion jumped by as much as 50% in 2009. Zeldin also notes the difficulty of tracking down parking ticket scofflaws without of state plates. In 2010, New York City alone racked up almost $7 million in unpaid traffic tickets on out of state vehicles. “Instead of disclosing their true address in high insurance premium places such as, for example, Bronx or Kings Counties, they state that they live in lower insurance premium rated territories such as North Carolina, Pennsylvania, or upstate counties that have lower incidents of motor vehicle theft, car accidents or judgments relegated to motor vehicle accident,” said Zeldin. This issue was a topic of a report released in 2006 by the State Commission on Investigations. Since 2006, the commission has sunsetted. Senator Klein is revising and updating this report. This new Report “Auto Insurance Rate Evasion” was released in February 2011. This bill implements many of the suggested changes contained in that Report. This situation or rate evasion, while artificially lowering the insurance rates of those who fraudulently do not disclose their true residential address, substantially increases the insurance premiums paid by those who truthfully disclose their actual place of residence and where they operated and garaged their cars. [IA]

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