New York Insurance Superintendent Eric Dinallo said Monday a revival of the defunct New York Insurance Exchange could happen as early as next year.
Dinallo, in a telephone interview from New York, said the next 18 months was a “realistic horizon” to revive what is seen as the U.S. equivalent of the Lloyd’s of London market.
The original New York exchange, which created a centralized marketplace for brokering and underwriting, was founded to great fanfare in 1980 but later that decade closed its doors after the industry was hit by a severe period of losses. New York laws permitting the exchange still exist.
This time around Dinallo sees the exchange as better positioned for success. “It is only going to work if there is client demand, but I believe that is falling into place.”
The exchange would allow underwriters to form syndicates to reinsure, and insure unusual or very large exposures.
Dinallo, who is forming a working group to set out exactly how the exchange could operate, has already tapped the views of a wide range of industry participants including both U.S. and foreign insurers, some of the major insurance brokerages and possible investors.
Several private equity, hedge fund and large investment banks have expressed interest, said Dinallo, seeing the exchange as a diversification tool.
“Non-traditional capital is looking for uncorrelated risk, which I think generally reinsurance, catastrophe and terrorism (risk) is… about as uncorrelated as you are going to get.”
Dinallo said regulatory oversight would seek to ensure risks insured by the exchange were not dominated by one geographical region or type of risk. Investors who backed claims paying ability of the exchange, would also have a role in policing the risks accepted by syndicates.
The exchange would seek permission to sell coverage across the United States, Dinallo said. That could help insurers who want to do business across the United States but are faced with the expense of state-by-state licensing and regulation.
The insurance industry has been lobbying U.S. lawmakers to create a federal insurance regulator but there is also resistance to the proposal.
The National Association of Insurance Commissioners, a body that represents state insurance regulators, has been lukewarm to a national regulator, concerned it could erode consumer rights.
Dinallo said the exchange could bypass some of these issues, by creating “federalization without federalization.” The idea was well received when he broached the topic with other state regulators earlier this year.
He said the exchange could be run on an electronic platform but also have physical space for clients to meet with brokers.
By increasing insurance and reinsurance capacity, the exchange could in turn lower pricing.
There are now more potential participants for the exchange than in the 1980s. A foreign reinsurance market, mostly in Bermuda, has since sprung up, and participants would likely be eager for greater access to U.S. business.
While reinsurance rates are currently softening because there have been few large claims in recent years, Dinallo said this was an ideal time to get the exchange off the ground, so everything would be in place once there was a need.
The exchange would also need be well capitalized enough to gain a strong credit rating, said Dinallo, something that could be a boon for insurance participants, clients and investors.
Insurers would effectively get the benefit of the exchange’s strong rating on any business done through the market, much as Lloyd’s syndicates do today. Clients would have the peace of mind of knowing that the exchange’s claims paying ability was secured by its strong capitalization.
An investment grade rating could also improve liquidity for investors because it could create trading opportunities. “They (investors) can be in and out — that is fine as long as the money coming in is as strong as the money leaving.”
Lloyd’s of London is the world’s oldest and largest insurance market, with permission to sell policies in about 30 countries and territories around the world.
(Reporting by Lilla Zuill; Editing by Tim Dobbyn)
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