New York Gov. David Paterson started a buzz in the market last night by voicing his strong interest in reviving an insurance exchange modeled after Lloyd's of London, which hosted the gala dinner where the governor made his pitch. The question circulating around the room was whether a new exchange could succeed after its predecessor crashed and burned over 20 years ago.

For those of you not fortunate enough to have spent 27-plus years covering this business, as I have, and who might not recall the New York Insurance Exchange, the facility debuted in 1980 as a syndicated, subscription-based market modeled after Lloyds of London, to write both specialized risks as well as reinsurance.

It was conceived during a capacity crunch, but folded seven years later, the victim of a softening insurance market, capital shortages and poor underwriting, among other problems cited by critics.

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

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

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

After the dinner, New York Superintendent Eric Dinallowho first raised the possibility of reactivating an exchange facility back in Februaryconfirmed that he is indeed exploring the option seriously.

Its something were taking a close look at, he told National Underwriter. Its very preliminary, but the fact is that covering non-correlated risks via an insurance syndicate as part of a central exchange might prove to be very attractive to investors.

It's important to note that it wouldn't take much, legally at least, to revive the exchange. In fact, although the original exchange folded back in 1987, the law authorizing creation of such a 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 might certainly be interested, as the exchange could provide capacity in certain challenging lines. Buyers always benefit from more competition as well.

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

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

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

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

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

But one must also take note of the debacle in the subprime lending market, in which very sophisticated institutional investors--eager for bigger yields in a low interest rate environment--blindly signed on for huge exposures via collateralized debt obligations backed by reckless homeowner loans.

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

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

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

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

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

What do you folks think?

Special Reports /

Paterson Pitches For N.Y. Insurance Exchange

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