By Lilla Zuill
The exchange would allow underwriters to form syndicates to reinsure and insure unusual or very large exposures.
N.Y.’s Dinallo Sees Insurance Exchange Open by 2009
New York Insurance Superintendent Eric Dinallo said a revival of the defunct New York Insurance Exchange could happen as early as next year. The next 18 months was a “realistic horizon” to revive what is seen as the U.S. equivalent of the Lloyd’s of London market, he said in a recent interview.
The original exchange, which created a centralized marketplace for brokering and underwriting, was founded in 1980 but later that decade closed its doors after the industry was hit by a severe losses. New York laws permitting the exchange still exist.
This time around Dinallo sees the exchange as better positioned for success. “It is only going to work if there is client demand, but I believe that is falling into place.”
The exchange would allow underwriters to form syndicates to reinsure, and insure unusual or very large exposures.
Dinallo, who is forming a working group to set out exactly how the exchange could operate, has already tapped the views of U.S. and foreign insurers, some of the major brokerages and possible investors. Several private equity, hedge fund and large investment banks have expressed interest, said Dinallo, who sees the exchange as a diversification tool.
“Non-traditional capital is looking for uncorrelated risk, which I think generally reinsurance, catastrophe and terrorism (risk) is… about as uncorrelated as you are going to get.”
Dinallo said regulatory oversight would seek to ensure risks insured by the exchange were not dominated by one geographical region or type of risk. Investors would also have a role in policing the risks accepted by syndicates.
The exchange would seek permission to sell coverage across the U.S., Dinallo said. That could help insurers that want to do business across the U.S. but are faced with the expense of state-by-state licensing and regulation.
Some in the insurance industry have been lobbying U.S. lawmakers to create a federal insurance regulator but there is also resistance to the proposal. The National Association of Insurance Commissioners has been lukewarm to a national regulator, out of concern for consumers’ rights.
Dinallo said the exchange could bypass some of these issues by creating “federalization without federalization.” He said the exchange could be run on an electronic platform but also have physical space for clients to meet with brokers.
By increasing insurance and reinsurance capacity, the exchange could lower pricing.
There are now more potential participants for the exchange than in the 1980s. A foreign reinsurance market, mostly in Bermuda, has since sprung up, and participants would likely be eager for greater access to U.S. business.
While reinsurance rates are currently softening, Dinallo said this was an ideal time to get the exchange off the ground, so everything would be in place once there was a need.
The exchange would also need to be well capitalized, enough to gain a strong credit rating, said Dinallo, something that could be a boon for insurance participants, clients and investors.
Insurers would effectively get the benefit of the exchange’s strong rating on any business done through the market, much as Lloyd’s syndicates do today. Clients would have the peace of mind of knowing that the exchange’s claims paying ability was secured by its capitalization.
An investment grade rating could also improve liquidity for investors because it could create trading opportunities.
“They (investors) can be in and out – that is fine as long as the money coming in is as strong as the money leaving,” Dinallo said.
Copyright 2008 Reuters.