New York Gov. David Paterson started a buzz in the market lastnight by voicing his strong interest in reviving an insuranceexchange modeled after Lloyd's of London, which hosted the galadinner where the governor made his pitch. The question circulatingaround the room was whether a new exchange could succeed after itspredecessor crashed and burned over 20 years ago.

For those of you not fortunate enough to have spent 27-plus yearscovering this business, as I have, and who might not recall the NewYork Insurance Exchange, the facility debuted in 1980 as asyndicated, subscription-based market modeled after Lloyds ofLondon, to write both specialized risks as well as reinsurance.

It was conceived during a capacity crunch, but folded sevenyears later, the victim of a softening insurance market, capitalshortages and poor underwriting, among other problems cited bycritics.

However, Gov. Paterson, in his speech last night, said the timemight be right to resurrect the exchange because the investmentinfrastructure is so different today than it was in the 1980s.

We have private equity funds and hedge funds and otherinvestment funds that might be eager to place their capital in theinsurance business right here in New York, he said. An exchangewould provide such an opportunity. This would be complementary towhat Lloyds does on its side of the ocean.

The exchange could create new capacity for hard-to-placerisks--such as terrorism--as well as bolster New Yorks position asa dominant player in the insurance world, Gov. Paterson noted.

After the dinner, New York Superintendent Eric Dinallowho firstraised the possibility of reactivating an exchange facility back inFebruaryconfirmed that he is indeed exploring the optionseriously.

Its something were taking a close look at, he told NationalUnderwriter. Its very preliminary, but the fact is that coveringnon-correlated risks via an insurance syndicate as part of acentral exchange might prove to be very attractive toinvestors.

It's important to note that it wouldn't take much, legally atleast, to revive the exchange. In fact, although the originalexchange folded back in 1987, the law authorizing creation of sucha facility remains on the books.

The biggest question, then, is whether having another N.Y.Insurance Exchange is a good idea.

Specialty market brokers and reinsurance intermediaries mightcertainly be interested, as the exchange could provide capacity incertain challenging lines. Buyers always benefit from morecompetition as well.

With all due respect to Lloyd's, perhaps this might be one wayto keep more insurance capital in the United States, much like theexpansion of Vermont and other domestic captive domiciles offeredrisk managers an alternative to doing business in Bermuda, theCayman Islands or other foreign havens.

However, some of those attending last night's dinner at theelegant St. Regis Hotel--an all-star cast of top players fromacross the industry--while voicing cautious optimism and genuinecuriosity about how the idea might play out, warned that recreatingan exchange would be far easier said than done.

A big part of the problem with the last exchange was theunderwriting talent employed, a few at the dinner observed.

Others said the facility drew far too much "naivecapacity"--investors who had no clue what they were getting into.When the market softened back then, prices plummeted, underwriterschased accounts off the proverbial cliff, and the exchange wasdiscredited before eventually going belly-up.

It's true that there are far more sophisticated institutionalinvestors in the insurance market today--just look at thereplacement of individual "Names" with corporate capital atLloyd's, as well as the growing use of catastrophe bonds.

But one must also take note of the debacle in the subprimelending market, in which very sophisticated institutionalinvestors--eager for bigger yields in a low interest rateenvironment--blindly signed on for huge exposures viacollateralized debt obligations backed by reckless homeownerloans.

It doesn't take much of an imagination to see similar woesbefalling naive investors in a new insurance exchange.

One person at the dinner very familiar with Equitas--thefacility formed by Lloyd's to run off long-tail claims that nearlyruined that venerable market's reputation--suggested that while itmight be easy to raise capital for such a venture, it might not beso easy to recruit the high-grade talent necessary to run iteffectively.

I suggested that you'd also need to mutualize the liabilitiessomehow--the way Lloyd's does with its Central Fund--so insuredswould be confident their claims would be paid no matter what.

I also wondered how would such a facility be regulated--with thestate insurance department looking carefully over the shoulders ofits managers and underwriters, or via some semi-self-regulatorystructure, such as at Lloyd's?

In any case, Gov. Paterson brought up an intriguingpossibility--one well worth exploring.

What do you folks think?