January 24, 2008

For almost a year now, the New York Superintendent of Insurance, Eric Dinallo, has been stating publicly that he is considering re-opening the old New York Insurance Exchange. He points out that the statute (NY Insurance Law Article 62) is still on the books, and perhaps an exchange facility could be used to address areas of coverage that lack adequate capacity. Does such a resurrection make any sense?

For those of you too young to remember, the New York Insurance Exchange was opened in 1980 as a Lloyd’s type marketplace with business submitted to member syndicates through member brokers. It was publicly touted as the US answer to Lloyd’s and, after a slow start, blossomed over the next several years, with over $300 million in GWP in 1983. By the end of 1984 the Exchange was the eighth largest US reinsurer by premium volume and fifth largest in surplus. By November 1987, however, the Exchange was closed and all its syndicates either in run-off or liquidation. For more information on the brief mercurial life and rapid demise of the Exchange, see my 2004 article “What Ever Happened to the New York Insurance Exchange (And Why Do We Care)?”

The question is, if the Exchange was such a failure in the 1980s, why consider re-opening an exchange today? My short answer is another question: Is Lloyd’s still a relevant market today? Given the renewed vibrancy of Lloyd’s over the past decade after its own financial tribulations (see Equitas), a Lloyd’s type facility not only can work, it can thrive. The financial woes of the New York Exchange and Lloyd’s bore many similarities, but the major difference was that Lloyd’s had three centuries of developed institutional and market support and New York did not. Done right, however, an exchange should be able to thrive in the US as well. The keys, of course, are defining and following through with “doing it right.”

To assist in this consideration, I offer a few principles that, in my view, should form the basis of any proposal to go forward:

  • The concept should be industry rather than regulator driven. The regulators can provide the forum and support for the development of a plan, but the primary force needs to come from inside the insurance and financial services industries if there is to be any lasting success.
  • The capital requirements for syndicates will need to be significantly greater (by many multiples) than the requirements of the old exchange.
  • There will need to be a strong commitment on the part of both the regulators and the industry to self-regulation and control of the market: with the regulators allowing the facility to develop rules controlling the operation and security of the market; and with the industry having the will to enforce its rules and its financial security requirements – a major failing of the old exchange.
  • And a new exchange will need to take full advantage of the technical developments over the decades since the original exchange, including instant communications, virtual trading capabilities and real time access to and use of transactional and other data.

There are many other issues that will need to be addressed by any group studying the possible resurrection of an insurance exchange, not the least of which are the types or lines of business to be allowed on a new exchange and the tax and regulatory considerations that force most new insurance capital off shore. But all of those issues can be considered within the framework of the foregoing principles.

Superintendent Dinallo appears to be taking a studied view and careful approach to the exchange resurrection prospects. It will be interesting to see if his interest can translate into real consideration. I, for one, hope so.

(For the record, I was the Vice President, Secretary and General Counsel of the New York Insurance Exchange from its opening in 1980 through 1985. I am also the author of Exchange: A Guide to an Alternative Insurance Market, NILS Publishing Co., 1987.)

What do you think?

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