New York Sees Promise in Own London-Like Market

A recently announced plan by New York’s governor to boost his state’s financial services industry by recreating the New York Insurance Exchange has drawn the attention of insurance industry executives and insiders – and not all of it positive.

The plan by Gov. David Paterson calls for an exchange that would be based in Manhattan, but also have substantial infrastructure and personnel in upstate New York – an economic development initiative that Paterson hopes could have a statewide impact.

It’s not the first time that state officials have pushed the idea of reviving the exchange. In July 2008, then-Superintendent Eric Dinallo said he wanted to reopen the insurance exchange by the end of 2009 – but that timeline was never met. Dinallo’s successor, current Superintendent James Wrynn, who took office in August, has also talked of a revival, although he has stopped short of giving a confident timeline.

Now that Paterson included the exchange in his State of the State speech as a key economic development effort, the New York Insurance Department is making the new New York Insurance Exchange (NYIE) a higher priority.

The vision is for an exchange structured similar to Lloyd’s of London, in which underwriting syndicates would compete to insure or reinsure unusual or very large risks. Wrynn, however, has dismissed the notion that a revived NYIE would be a competitor to Lloyd’s.

“Lloyd’s would be a model but (this exchange) would not be a New York Lloyd’s of London,” Wrynn said. “We would like our own theme and focus.”

Benefits Lauded

Wrynn and others say there is a rationale for this type of market mechanism – at least on paper. More than 50 percent of the business written through Lloyd’s originates in North America – meaning companies are sending tremendous amounts of premium to Europe to buy coverage needed for complicated risks in the United States. Plus, they say an exchange could allow companies to write business in multiple states without the added cost of state-by-state licensing and oversight by different regulators.

Paterson’s office projects the exchange could eventually generate 2,000 to 3,000 jobs and bring in an additional $7 billion to $10 billion in premiums.

It might also attract a broader base of capital into the insurance industry by allowing non-traditional players like hedge funds or private equity firms to underwrite risks.

The possibility of a revived exchange has drawn praise from some. The Professional Insurance Agents of New York (PIANY) lauded the decision, as Kevin M. Ryan, president of PIANY said the exchange would “provide the opportunity to bring much-needed business activity back into the state.”

Independent Insurance Agents & Brokers of New York was a supporter of the original New York Insurance Exchange in the 1980s, and supports a revival of the exchange if it means keeping more insurance business and jobs in New York, says Tim Dodge, IIABNY’s director of external communications.

Even Lloyd’s is sounding supportive.

“We welcome the competition; who wouldn’t?” said Hank Watkins, president of Lloyd’s North America. Watkins, who oversees the London-based market’s operations on this side of the Atlantic, said that Lloyd’s has discussed the exchange with state regulators and would like to be included in working on the proposal in the future.

But not everyone – even within Lloyd’s – sees a revived New York exchange as a good move – or even a sure bet.

Skeptics point to the continuing soft market and the track records of other such endeavors for their lack of enthusiasm.

In an interview earlier this month, Tom Bolt, underwriting performance director at Lloyd’s, told the Financial Times: “One of the questions you’d ask yourself … is how much do you want to start an exchange heading into a soft market, where price adequacy is going to be less interesting than it has been at other times?”

One of the nation’s biggest insurance wholesalers that might use such an exchange thinks that even if it is a good idea, the timing is wrong.

“The problem we have now is that there is over-capacity; that’s why rates are so low,” said Alan Kaufman, chairman, president and CEO of Burns and Wilcox. “From where we sit, we would not be anxious to place business through that marketplace, in a market right now where there is plenty of opportunities, domestically and internationally to find coverage. All kinds of layers, excess layers so I don’t see a need for more capacity.”

Kaufman questions whether a NYIE will be able to attract investors today.

“Why does money come into the insurance market when the rates are soft as they are? Why would more companies want to invest when rates are soft and with the anticipation right now that rates aren’t going to provide a good underwriting return as it is?” he said.

Still, others cautiously believe that a revived NYIE would find its niche in the market.

“Well-capitalized and well-managed surplus lines markets will always find a place in the surplus lines arena,” said Dick Bouhan, executive director of the National Association of Surplus Lines Offices. “However, given the current market conditions and trends, (it) will be a significant challenge for its promoters. … Whether the problems that led to the closure of the (original) exchange will impact the creation and operation of a second New York Insurance Exchange remain to be seen.”

Curtis Anderson, president of American Association of Managing General Agents, says that while most MGAs would not benefit from a recreation of the New York Insurance Exchange due to the intended size and type of business that it would target, his group is also watching its development closely. “Many of our MGA members currently do business with Lloyd’s,” he noted. “We’re hopeful that the lessons learned from the failure of the prior exchanges will benefit those involved in the re-creation of the New York Insurance Exchange.”

Past Experience

The history of insurance exchanges of this kind is not necessarily encouraging. The original NYIE, launched in 1980, operated for seven years before collapsing due to weak capitalization, high claims and a soft market. At its high point, the NYIE had as many as 50 syndicates and was ranked as the world’s eighth largest reinsurer.

Two other exchanges were launched in the 1980s: The Miami-based Exchange of the Americas, which was also later shut down, and the Illinois Insurance Exchange, now known as INEX, which still operates, though it has only one active syndicate.

Some say the negative experience of past exchanges doesn’t mean history has to be repeated. “The insurance marketplace is much different today than in the 1980s,” said PIA’s Ryan. “It’s much more sophisticated, making it likely that the NYIE will be a success.”

In fact, the experience of U.S.-based exchanges could provide worthwhile lessons for future incarnations.

“It’s a very interesting concept and well worth studying thoroughly,” said 35-year industry veteran Gerald J. Sullivan, chairman of Los Angeles-based The Sullivan Group, one of the largest privately owned insurance brokerages in the country, specializing in the wholesale, reinsurance and retail segments of the industry. “If New York decides to go ahead with a new exchange, they of course want to do it right and I’m sure they’ll incorporate the many lessons learned from the past.”

Among those lessons, Sullivan said: an exchange that is state-regulated – rather than self-regulated – and the creation of high-tech, back-office support to handle underwriting and other day-to-day administrative aspects of running an exchange.

Sullivan said it’s also important for the exchange to attract experienced syndicate managers and underwriters who have expertise writing the complicated business that is likely to be brokered on the NYIE. The exchange should also have conservative premium-to-surplus ratios and strong risk-based capital requirements.

Peter Bickford, a lawyer and reinsurance arbitrator in New York, who served as vice president and general counsel for NYIE from 1980 to 1985, agrees that the past offers lessons worth learning but he is enthusiastic about the second time around for an exchange because, he says, the industry and technology have changed tremendously over the last 30 years.

“In the early 1980s there were no alternative markets,” he said. “There were no captives. There was no excess in Bermuda. There were no risk-based capital principles in place at that time. There were none of the alternative risk-spreading devices that exist today. Even the data access and computer access is so radically different that has all come since the exchange.”

The first exchange also suffered from perception issues, Bickford said. The NYIE did not act like a true market and became a repository for risks that other companies wouldn’t write. The capital requirements to create a syndicate in the former NYIE were also “absurdly low,” he said – another obstacle the exchange had difficulty overcoming. The Minimum capital requirement for the NYIE was $2.2.million – about $5.7 million in today’s dollars.

According to the former NYIE counsel, another development that bodes well for a 2010-style exchange is the number of international players who want access to the American market without having to go through Lloyd’s of London. A NYIE could be a kind of complement to Lloyd’s, he said.

“But it needs to be like Lloyd’s is: a facility where non-insurance company capital in the market through underwriting expertise,” he said. “That didn’t happen in the truest sense with the New York Insurance Exchange.”