Insurance

New York Insurance Superintendent Eric Dinallo is stepping down, leaving the most important U.S. regulatory post in the industry vacant.

Dinallo will become a visiting professor at New York University’s Stern School of Business, Governor David Paterson’s office said in a statement yesterday. Insurance is regulated in the U.S. by states, giving the New York watchdog an outsized role with oversight in the country’s financial center.

Dinallo, 45, spoke out about the need for cooperation between state and federal regulators in the aftermath of the U.S. bailout of American International Group Inc. He testified in Congress about efforts to protect policyholders of AIG, once the world’s biggest carrier. When bond insurers faltered, he engineered the entrance of Warren Buffett’s Berkshire Hathaway Inc. to bolster the market.

“Without a doubt he tried to set the agenda,” said Robert Haines, an analyst at CreditSights Inc. “He was putting ideas out there and was trying to address the problems much more so than a lot of the regulators out there that seemed to be trying to cover their” reputations.

Dinallo was appointed to the insurance post by then- Governor Eliot Spitzer in 2007. Dinallo assisted on probes of financial firms when he worked for Spitzer at the state attorney general’s office. The New York Times said May 27 Dinallo may be a candidate in the race to become attorney general. His resignation from the insurance post is effective July 3.

Worker’s Compensation

Marissa Shorenstein, a spokeswoman for the governor, had no comment on who would succeed Dinallo. Andy Mais, a spokesman for the New York insurance department, said Dinallo was unavailable for comment, and referred questions to Paterson’s office.

Paterson, in his statement, said Dinallo helped reform workers’ compensation and collaborated with state officials and federal regulators in the rescue of New York-based AIG. The governor and Dinallo had a “wonderful working relationship,” Shorenstein said.

“We are living through one of the most challenging times in our country’s financial history,” Dinallo said in a statement distributed by Business Wire. “Joining NYU gives me a great opportunity to continue to participate in critical financial issues from a new perspective.”

Dinallo helped bolster the business of insuring municipal bonds after companies including MBIA Inc. and Ambac Financial Group Inc. were overwhelmed by losses on securities backed by home loans. Dinallo in 2007 approved Berkshire’s entry into the business, then brokered deals to allow money-losing guarantors to make partial payments on insurance contracts with banks.

Bond Insurance

He also helped MBIA split its municipal bond insurance business from the mortgage-related debt guarantees that led to the loss of its top credit ratings.

“He used his office as a bully pulpit,” Sean Dilweg, Wisconsin insurance commissioner and a friend of Dinallo, said in an interview. “He really laid the groundwork for all the discussions we have now” about preventing the collapse of financial firms.

Bank of America Corp., JPMorgan Chase & Co., UBS AG and 15 more of the world’s largest financial companies this month challenged Dinallo’s approval of MBIA’s split, suing to reverse the biggest bond insurer’s separation as they claimed it illegally cut their odds of getting paid on policies.

Dilweg, who oversees Ambac’s main unit, said in a March interview that “we’ve always had concerns with splitting the book because you get into drawing lines and giving preferences,” referring to that New York-based insurer’s guarantees.

Looking to New York

Howard Mills, who was New York insurance superintendent in 2005 and 2006, said watchdogs elsewhere look to New York for guidance and the job is “seen justifiably as the most significant regulatory post for insurance.” Mills is now chief adviser for the insurance group at Deloitte & Touche LLP.

A graduate of New York University, Dinallo previously worked for Willis Group Holdings Ltd., the world’s third-largest insurance broker.

Dinallo was called to testify in Congress and the state legislature about the risk of credit-default swaps, the derivatives that brought AIG within hours of bankruptcy.

The contracts, which allow investors to speculate on the creditworthiness of borrowers, were “more dangerous” than gambling, Dinallo said in December at a New York Assembly hearing in Manhattan. Unlike casinos, swaps sellers aren’t required to keep funds to pay losing wagers, he said.

Broader Oversight

Dinallo said in September that a portion of the market should be regulated like insurance to ensure companies have enough funds to meet commitments. He shelved the proposal because of progress by federal regulators on broader oversight of the market.

Illinois Insurance Director Michael McRaith and Dinallo were heading a committee of the National Association of Insurance Commissioners looking into whether regulators were too dependent on ratings from firms including Standard & Poor’s and Moody’s Investors Service. Dinallo said in a Wall Street Journal op-ed in March that the current rating system is “fundamentally flawed” and leads to inflated credit grades.

“I’ve enjoyed working with Eric for the last couple of years,” McRaith said in an interview. “I’ve not always agreed with everything Eric’s said. But, he’s always engaged, and he moved the discussion forward.”