The Need for a US Syndicated Capital Facility for Insurance Risks

Last week AON announced it is moving its headquarters to London "to be closer to Lloyd's" among other considerations.  Today Bermuda announced a 50% increase in new insurer registrations, with the largest jump in special purpose insurers. These recent headlines underscore the value to insurance risk bearers, investors and consumers of the flexibility that a strong, well-conceived syndicated capital facility can bring to the marketplace. How sad that the US has no domestic answer to these continued defections of market makers and investors. How sad that we do not have a single existing market for syndicated insurance capital that could compete to keep our domestic business home.

A plan exists to create such a market, of course (See New York Insurance Risk Exchange Plan) but it needs the spotlight of savvy and forward-thinking regulators and industry leadership to make it a reality.  The current market tightening and the widening search for intelligent capacity should signal that the time is now as never before for such a facility. 

A NEW BEGINNING

As of today, October 3, 2011, the New York Insurance Department, believed to be the oldest state regulatory agency in the United States, no longer exists! Today the former insurance and banking departments are merged into the new Department of Financial Services, and the new Superintendent of Financial Services, Benjamin Lawsky, becomes the chief regulator of both the banking and insurance businesses. The picture gallery of past insurance superintendents on the 3^rd floor of 25 Beaver Street, which begins with William Barnes in 1860, will end with James Wrynn 151 years later.

The new agency has the opportunity to demonstrate that this sea change in the regulatory framework in New York is a new beginning, and that it intends to fulfill the stated goals of the merger legislation.  This starts with the first stated goal: “[T]o encourage, promote and assist banking, insurance and other financial services institutions to effectively and productively locate, operate, employ, grow, remain, and expand in New York state; . . .”  Nothing could be more in line with this goal than the revival of the insurance exchange!

As many of you are aware, over a year ago the industry working group established by Superintendent Wrynn issued its preliminary recommendations for the reestablishment of an insurance exchange.  After several fits and starts, a draft plan to implement these recommendations was drafted.  However, even though a draft, and with little if any downside to the regulators, release of the draft plan release was repeatedly postponed at the request of the administration.

Today is a new day, and in honor of the old insurance department, and in support of the principal goal of its successor agency, I have posted the draft plan for the implementation of the industry working group preliminary recommendations on the “NY Insurance Risk Exchange (NY-REX)" page of my web site.  Here is the link to that page.  It is my hope that the new agency will embrace the exchange concept under its stated goals, and that it is not too late for its successful reincarnation. 

Farewell Insurance Department! Hello Insurance Bureau of the Department of Financial Services!

Insurance Exchange Update

In February 2010, New York Superintendent James Wrynn convened the first meeting of a Working Group of interested parties from the insurance industry, the investment community and others to consider the revival of an insurance exchange in New York. This Working Group, to which Superintendent Wrynn appointed me as a Special Advisor*, was divided into a number of sub-groups to consider various aspects of the Exchange issue, including: markets, government relations, taxes, operations and technology, capitalization, regulatory oversight and multi-state issues. Each of the various sub-groups met and conferred over the months following the initial Working Group meeting. These deliberations resulted in the presentation at the end of June 2010 of preliminary recommendations of the sub-groups. A copy of this presentation, prepared by the New York Insurance Department, can be accessed on my website at www.pbnylaw.com (on the Insurance Exchange page).

The next phase of this project is the preparation of an action/business plan to be presented for comment to the full Working Group. It is anticipated that an initial draft plan will be available by early Fall 2010.

*Although I am a special advisor to the Insurance Exchange Working Group and its various sub-groups, the views expressed by me at this blog site, my various articles or elsewhere on the Insurance Exchange topic are solely mine, and do not necessarily reflect those of the New York Superintendent of Insurance, the New York Insurance Department, the Exchange Working Group or the various sub-groups.

NEW YORK INSURANCE EXCHANGE: PLAYERS WANTED!

Marsh and McLennan Companies CEO, Brian Duperreault, reportedly told attendees at the recent Insurance Day Summit in Bermuda that the proposal to revive the New York Insurance Exchange would face an “uphill battle” to create a market in current conditions. While this view certainly has some truth to it, and many of his observations about the issues facing the effort to revive the Exchange are well taken, the concern is that these views are preventing engagement in a unique opportunity by many potential insurance and financial participants.

One of the most challenging hurdles being faced by the Exchange working group established by NY Superintendent Wrynn is the “wait and see” attitude of many key players – let’s see what “they” come up with before we decide if it will work for us. Hopefully, Mr. Duperreault is not placing Marsh in this category. Given all the publicity about the revival efforts, and the fact that the Exchange would be a brokerage market, why wouldn’t Marsh – or any major US based brokerage firm -- jump at the opportunity to actively participate in the effort – to help with the design, structure and scope of the Exchange? And why wouldn't any broker, underwriter, manager or investor that utilizes the Lloyd's market be interested in creating a similar market closer to home? Rather than leaving the decisions on the look, feel and structure of the Exchange to others, the time to participate is now while the input has meaning.

Mr. Duperreault reportedly stated, “The last New York Exchange started at absolutely the worst possible time in that market and that didn’t work out too well to say the least.” While it is true that the Exchange opened during a soft market, it was conceived and constructed during a seriously hard market. Now it is being considered during a soft market, but by the time it is constructed and operational it could very well be in a hard market. The lesson is that the exchange cannot and should not be viewed as a product for a moment. It should be viewed as a marketplace for the long haul, with the structure and flexibility to address changing market needs. With enabling legislation already on the books and the New York regulators providing the impetus and support for the revival effort, it would be disappointing indeed if the insurance and financial industry leaders did not take full advantage of the opportunity to support and participate in the initiative.

It is also disappointing when leaders like Mr. Duperreault feel the need to take a gratuitous shot at the experience of the old Exchange. Aside from perpetuating the misconception that the Exchange market failed*, the circumstances are far different today than they were 30 years ago!

What Superintendent Wrynn and his staff need now is insurance and financial industry leadership in helping take advantage of current circumstances to move the Exchange forward. Everyone agrees that there are many challenges in making this happen, but the gain in creating a potentially significant, modern and flexible market should be incentive enough to make it worth the effort.

This effort, however, needs Architects -- not cynics! Builders -- not fabricators! Players -- not spectators!

_________________

*At the time the Exchange’s Board of Governors chose to close the facility there was a significant, well-structured and capitalized group of syndicates willing and able to continue with the Exchange. For more information on the history of the original Exchange, including the Board’s decision to close the facility, see my article “The Once and Future New York Insurance Exchange”, February 2010, at www.pbnylaw.com (on the Insurance Exchange page).

NOTE: Although I am a special advisor to Superintendent Wrynn's Insurance Exchange working Group, the views expressed by me above or elsewhere on this topic are solely mine, and do not necessarily reflect those of the Superintendent, the Insurance Department or the Working Group.

The Once and Future New York Insurance Exchange

Since the idea of re-establishing the exchange surfaced a couple of years ago, I have been repeatedly asked what has changed in the past two decades to make a Lloyds-style insurance exchange workable in the US today when it did not seem to work before? To help the dialogue on these and other questions about reviving the exchange, I wrote an article "The Once and Future New York Insurance Exchange," a copy of which I placed on the insurance exchange page of my website.

I am extremely pleased that Insurance Advocate magazine considered this topic of such interest that it published my article as its cover story in the March 8, 2010 issue, and that it has posted the article on its website at http://www.insurance-advocate.com/ (click on "preview article").

If you have any interest in this topic, I hope you will take a few minutes to read my article and possibly comment on your views about the topic to me.

Insurance Exchange Redux

After a bit of a sabbatical, I am back with a new focus: the revival of an insurance exchange in New York!

In January 2010 New York's Governor Patterson listed in his State-of-the-State message a number of economic initiatives to be pursued by his administration. Among them was a commitment to “rebuild the New York Insurance Exchange.” The Superintendent of Insurance, James Wrynn, has backed up this commitment by establishing a Working Group with several sub-groups to help formulate an action plan for the re-establishment of an insurance exchange in New York.

In February 2010, I was appointed by Superintendent Wrynn as a Special Advisor to the Insurance Department’s insurance exchange Working Group. Because of the interest in reviving the insurance exchange, the numerous requests I have received for materials on the old exchange, and my role as special Advisor to the Working Group, I have added a page to my web site with links to governing documents, articles, studies and publications relating to the original exchange. Click here to go to this new page, which includes links to pdf copies of the constitution and by laws and operating rules of the old exchange taken from my book Exchange: A Guide to an Alternative Insurance Market (NILS Publishing Co. 1987-1990), as well as the operative statute (Article 62 of the New York insurance law) and regulations (NY Regs 89, 89A and 89B) . It is hoped that making this information readily available to all interested parties will assist in the new effort.

Knowing the laws, regulations, rules, procedures and systems of the old exchange, however, is not the same as knowing which of those worked or did not work, and why. For that insight, there is no substitute for having been there; and having been there I plan to comment on a number of these matters as the Working Group moves forward.

Insurance Exchange Update

Because of the recent interest in reviving the insurance exchange in New York, and the numerous requests I have received for materials on the old New York Insurance Exchange, I have posted a new section of articles, studies and publications relating to the old Exchange to my website. these materials can be accessed at www.pbnylaw.com/publications.html.

One of the articles at this site is my 2004 article presented at a Practicing Law Institute seminar on run-offs and commutations, "What Ever happened to the New York Insurance Exchange (and why do we care?)." In that article I stated that the Exchange's Security Fund's plan for the distribution of about $81.8 million against obligations of $112.5 million had been approved by the Court in February 2004, but that no distribution had been made under the plan as of the date of the article in November 2004. Several people have asked whether a distrbution was ever made. the answer is yes, but it required some pressure to accomplish.

In December 2004, I brought a further motion before the Court to force the Security Fund to comply with its own plan and distribute the funds available for distribution immediately. As a result of this motion, in early January 2005 the Security Fund made a distribution of $81.6 million, or 72.05% of approved claims. this was followed in June 2005 with a second and final distribution of an additional $4.1 million, or 5.29%, to the same claimants. Following these distributions, which constituted substantially all of the assets of the Security Fund less administrative and closing expenses and reserves, the Security Fund filed a final report with the Court. the Court approved the final report and discharged the Security Fund from any further obligations to claimants in May 2006.

HAS THE TIME COME FOR A NEW INSURANCE EXCHANGE?

For almost a year now, the New York Superintendent of Insurance, Eric Dinallo, has been stating publicly that he is considering re-opening the old New York Insurance Exchange. He points out that the statute (NY Insurance Law Article 62) is still on the books, and perhaps an exchange facility could be used to address areas of coverage that lack adequate capacity. Does such a resurrection make any sense?

For those of you too young to remember, the New York Insurance Exchange was opened in 1980 as a Lloyd’s type marketplace with business submitted to member syndicates through member brokers. It was publicly touted as the US answer to Lloyd’s and, after a slow start, blossomed over the next several years, with over $300 million in GWP in 1983. By the end of 1984 the Exchange was the eighth largest US reinsurer by premium volume and fifth largest in surplus. By November 1987, however, the Exchange was closed and all its syndicates either in run-off or liquidation. For more information on the brief mercurial life and rapid demise of the Exchange, see my 2004 article “What Ever Happened to the New York Insurance Exchange (And Why Do We Care)?”
(www.pbnylaw.com/articles/newyorkinsuranceexchangearticle11-04.pdf)

The question is, if the Exchange was such a failure in the 1980s, why consider re-opening an exchange today? My short answer is another question: Is Lloyd’s still a relevant market today? Given the renewed vibrancy of Lloyd’s over the past decade after its own financial tribulations (see Equitas), a Lloyd’s type facility not only can work, it can thrive. The financial woes of the New York Exchange and Lloyd’s bore many similarities, but the major difference was that Lloyd’s had three centuries of developed institutional and market support and New York did not. Done right, however, an exchange should be able to thrive in the US as well. The keys, of course, are defining and following through with "doing it right."

To assist in this consideration, I offer a few principles that, in my view, should form the basis of any proposal to go forward:

• The concept should be industry rather than regulator driven. The regulators can provide the forum and support for the development of a plan, but the primary force needs to come from inside the insurance and financial services industries if there is to be any lasting success.
  
• The capital requirements for syndicates will need to be significantly greater (by many multiples) than the requirements of the old exchange.
  
• There will need to be a strong commitment on the part of both the regulators and the industry to self-regulation and control of the market: with the regulators allowing the facility to develop rules controlling the operation and security of the market; and with the industry having the will to enforce its rules and its financial security requirements – a major failing of the old exchange.
  
• And a new exchange will need to take full advantage of the technical developments over the decades since the original exchange, including instant communications, virtual trading capabilities and real time access to and use of transactional and other data.

There are many other issues that will need to be addressed by any group studying the possible resurrection of an insurance exchange, not the least of which are the types or lines of business to be allowed on a new exchange and the tax and regulatory considerations that force most new insurance capital off shore. But all of those issues can be considered within the framework of the foregoing principles.

Superintendent Dinallo appears to be taking a studied view and careful approach to the exchange resurrection prospects. It will be interesting to see if his interest can translate into real consideration. I, for one, hope so.

(For the record, I was the Vice President, Secretary and General Counsel of the New York Insurance Exchange from its opening in 1980 through 1985. I am also the author of Exchange: A Guide to an Alternative Insurance Market, NILS Publishing Co., 1987.)