The idea of resurrecting the New York Insurance Exchange,floated last year by the New York Insurance Department and New YorkGov. David Paterson, has not been sunk by the financial meltdownand capital crunch, according to the state's insurancesuperintendent.

“It remains a great potential alternative to Bermuda,” said EricDinallo, during a dinner speech before the annual Property-CasualtyInsurance Joint Industry Forum earlier this month. “We already havethe statute on the books.”

Even though the economy is in crisis, Mr. Dinallo argued thatwith the insurance market hardening, and given the lessons learnedfrom the launch of the first exchange, the concept could work thistime.

“One of the reasons it failed in the 1980s is because it wasmade up of just a bunch of insurers who put on masks in amasquerade ball. It was really the same capital funding all theother risks through traditional insurance,” he explained.

Today, he added, even with capital harder to come by–and withnew suppliers, such as hedge funds, having financial problems–thereremains enough private equity investors seeking sound opportunitiesto make a well-managed insurance exchange viable. “We also have alot more technology and modeling capabilities at our disposal thanwe did back then,” he said.

“With people beating the drums about the tax disparity withBermuda, this would be a huge opportunity for New York to come outas an insurance market leader,” according to Mr. Dinallo.

He urged industry officials to contact his office with feedback.“Is this a good idea or bad idea? We want to explore that thisyear,” he said.

Addressing a different topic, the state regulator said AmericanInternational Group's bailout by Washington does not prove the needfor a national regulator, but if a federal charter is establishedby Congress it should not be optional.

“AIG is not Exhibit A for a federal regulator. It is exactly theopposite,” Mr. Dinallo told leaders of insurance companies andtheir trade organizations attending the forum.

“The strength of AIG's insurance units and the regulatory moatsthat were built around their capital is actually proof that stateregulators had a better handle on their end of the business” thandid federal regulators overseeing the banking and securitiesmarkets, he added.

While conceding that AIG's financial woes exposed regulatorygaps “at the holding company level” that must be closed somehow,and that the federal government should certainly explore the ideaof establishing a “systemic risk regulator” of some sort, Mr.Dinallo predicted that making a national charter “optional” wouldprove to be counterproductive.

“It's a bad idea,” he said. “The regulatory relationship shouldbe like a marriage–you should be stuck with one another. It shouldnot be like dating, where you can just take a walk whenever you'renot happy with your partner.”

He argued that having an optional regulatory structure would“create an inevitable distancing” between carriers and thoseoverseeing them–state or federal.

“If you can always go somewhere else to be regulated, thatcreates its own gaps, since every five years you may have to endurea spasmodic churning of the industry” as insurers choose adifferent regulator.

However, if Congress does create a federal oversight system,optional or otherwise, he said, “it should not bifurcate solvencyfrom rate and market conduct regulation” but instead shouldsupervise all under one roof, as separating functions would createregulatory conflicts of interest.

Still, having Washington assume complete responsibility for allinsurance activities is problematic, since “I don't honestly seethe feds handling all these consumer complaints” about insurers, asthe states do now, Mr. Dinallo said.

Even if federal regulation does become a reality, “I thinkyou're at least two years away from that,” according to Mr.Dinallo, citing the number of more critical issues to be addressedin Washington, including broader financial services overhaul.

In the interim, he said Congress might create an Office ofInsurance Information to serve as a point agency on internationaltrade and to alleviate the “blind spots” he said Washington haswhen it comes to this industry. That would be fine with him, headded.