The original New York Insurance Exchange (NYIE) opened for business on March 31, 1980. History, though, tells us that it would have been more fitting if the exchange had opened the next morning -- on April Fools' Day. Hindered by a soft market, inadequate capital requirements and other issues, the exchange disbanded in late 1987.
More than 20 years later, however, the state of New York is set to give the exchange new life. In his 2010 State of the State address, New York Governor David A. Patterson announced plans to create a new NYIE as part of a broader plan to help rebuild the state's struggling economy. No new legislation is needed to authorize the new NYIE, as state laws allowing the creation of the 1980 exchange remain on the books.
"By bringing together the buyers and sellers of complex commercial insurance, the exchange will reaffirm our status as the focal point of international trade and finance," Patterson said in his speech. "It will also curtail the types of transactions that were unregulated that decimated the global economy."
According to the governor's office, the NYIE will be modeled after Lloyd's of London, a London-based insurance market composed of underwriting syndicates and brokers that specializes in complicated, hard-to-price risks. "Groups of investors, such as hedge funds, private equity funds, investment banks and traditional insurance companies, would come together to form syndicates and become members of the exchange," a fact sheet provided by the governor's office says. "Brokers would then bring large property or reinsurance risks to the 'floor' of the exchange to seek bids from investors to take on the risk."
Andrew Barile, CEO of Andrew Barile Consulting Corp. (Rancho Santa Fe, Calif.), worked for Lloyd's of London ($29 billion in 2008 gross written premium) early in his career and also helped start one of the larger brokerages on the original NYIE. The NYIE could be successful this time around, he says, because of the ways the industry and technology have evolved since the 1980s. "We've learned from our many mistakes, and now it's a different time," he says.
The U.S. insurance industry has started to produce a new generation of underwriting executives who come from the same mold as Lloyd's of London syndicate underwriters, according to Barile. "The type of person who could be an underwriter at a syndicate is being generated today. We didn't have that style when we first started the [1980 NYIE]," he recalls. "Most of insurance underwriting in those days was done by committee as opposed to individuals. The key to Lloyds' success has always been that the individual underwriter makes all the decisions."
In addition, the creation of hedge funds could provide the exchange with sufficient amounts of capital. "We now have hedge fund entrepreneurs who have raised billions of dollars in capital that has to be put at risk, so we have the ability to generate syndicates," Barile explains. "One of the biggest weaknesses of the New York Insurance Exchange the last time around was that it didn't have enough capital to stay in the business."
A Strong Tech Foundation
Creating a technology infrastructure will be key to the development and ultimate success of the new NYIE, according to observers. "A solid technology platform will be critical to success," says Bill Hartnett, general manager of Redmond, Wash.-based Microsoft's insurance solutions group, which has worked to help the Council of Insurance Agents & Brokers (CIAB) and LexisNexis build another insurance exchange.
"Typically the technology challenges of such an exchange would include the need to assure the participants that their transactions will be handled securely and that all data will be maintained so as to achieve the goals of full confidentiality, integrity and availability," Hartnett continues. "The technology also must be capable of handling large volumes of transactions while still applying regulatory controls in real time."
Barile Consulting's Barile says the NYIE and its potential syndicates will be competing with traditional insurance companies and dealing with brokers that are operating on a global basis. As a result, it's important that the NYIE has the technology capabilities needed to compete. In addition, up-to-date catastrophe modeling capabilities and financial and accounting technology also will be important pieces of the exchange's IT environment.
Simply put, there is technology that exists now that did not exist in 1980s, Barile points out. That fact, coupled with better access to data from multiple sources, could help the NYIE succeed where it has previously failed, he notes.
"Access to data, access to underwriting information -- it all goes into the decision-making process of whether to write a risk or not," Barile says. "The underwriters can basically put you out of business because if their risk selection isn't properly done, you won't have a syndicate after a while. The losses will exceed the premiums. This time around, though, it's possible to provide the underwriter with enough information about a particular risk in a short time frame."