Should Florida Follow New York and Revive Its Surplus Lines Exchange?

March 30, 2010

New York regulators are pursuing a reincarnation of the New York Insurance Exchange, a Lloyd’s of London-style insurance market that lasted for several years the last time it was tried.

New York Insurance Superintendent James Wrynn said the exchange would help fill demand for complicated, large or risky insurance contracts and could help retain some of the dollars that currently flow into Lloyd’s.

New York was one of three states to experiment with exchanges back in the early 1980s with limited success. The original New York Insurance Exchange opened in 1980 but shut down in 1987, a collapse attributed to weak capitalization, high claims and the soft market.

Illinois launched one that is still in business, although it’s scaled back to only one syndicate.

Florida also launched one in Miami—it was called the Insurance Exchange of the Americas (IEA), reflecting the hope of its backers that it would capitalize on the city’s international business reputation. For a short while, it worked. By 1986, premium volume was up to $262.7 million and there were about 25 syndicates.

But trouble began after audit of 1986 results disclosed poor record keeping, misreporting of losses and a surprise shortfall of as much as $15 million. In February 19987, state insurance officials stopped it from writing any more business. Bill Gunter, insurance commissioner at the time, said only four syndicates were healthy and set down strict terms it would have to meet before it would be allowed to resume writing. As it spiraled downward, there were various allegations of fraud followed by investor lawsuits. The IEA was unable to get its act together and its doors were closed later that year.

As for the new one in New York, there is no clear launch date yet. Executives from more than 50 companies, state agencies and industry groups met with New York Insurance Department officials recently to begin hashing out details. The group included executives from Marsh, Lloyd’s, Aon, Chartis, Swiss Re, Berkshire Hathaway and others.

Skeptics question whether the New York or any facility will be able to attract the capital it needs given today’s economy and whether a new facility is even needed in today’s marketplace.

“The problem we have now is that there is over-capacity; that’s why rates are so low,” Alan Kaufman, chairman, president and CEO of Burns and Wilcox, told Insurance Journal. He said he doesn’t see a need for the capacity a new exchange might promise.

Others believe that a revived NYIE could possibly gain traction. “Well-capitalized and well-managed surplus lines markets will always find a place in the surplus lines arena,” said Dick Bouhan, executive director of the National Association of Surplus Lines Offices. “However, given the current market conditions and trends, (it) will be a significant challenge for its promoters.”

Others are bit more enthusiastic, maintaining that lessons can be learned from the past failures.

Peter Bickford, a lawyer and reinsurance arbitrator in New York, who served as general counsel for NYIE from 1980 to 1985, supports the second time around for an exchange because, he says, the industry and technology have changed tremendously over the last 30 years.

“In the early 1980s there were no alternative markets,” he said. “There were no captives. There was no excess in Bermuda. There were no risk-based capital principles in place at that time. There were none of the alternative risk- spreading devices that exist today. Even the data access and computer access is so radically different …that has all come since the exchange.”

A recent online poll by found 150 readers split over the idea of restarting the New York facility. Forty-two percent opposed the restart because the timing is not right (11%) or it didn’t work before (31%). A similar percentage backed the restart because it might help keep accounts and jobs in the U.S. (20%) or because it could be started and be ready when the market turns (22%). Sixteen percent were not sure.

For others, it’s too early to judge.

It’s premature, probably, to determine exactly what structure it will take and where the capital will come from and what lines of business they’re going to write and how big an impact they’re going to make. It’s just premature at this point to determine that,” said Bruce Bowers, who runs National Risk Solutions, an online wholesale division of national excess and surplus brokerage Hull & Co.

Bowers is in Florida, where he is not alone in remembering that state’s own experiment with the Miami facility, which he said served a real need before “the wheels came off.”

Out of 25 Florida surplus lines insurance agents surveyed by Insurance Journal, 10 said they would find a revived New York “potentially useful.”

But asked if their own state should follow New York’s lead and consider getting back into the insurance exchange business itself, 21 of 25 Florida agents said no.

Tom Enright of Enright & Wilson is among the Florida skeptics.

“I’ve been through the mid-eighties and Florida insurance exchange and it failed. Someone would have to explain to me how it could work. You would need a large investment and many potential markets and I don’t see that happening,” Enright said.

Another Florida agent didn’t like the idea of a new Florida facility because he thinks it’s unnecessary. “There are plenty of resources within the wholesale community to obtain markets. I don’t believe an exchange would create anything new to the Florida market,” the agent said.

Florida should let history be its guide, according to another. “Florida has proved it is incapable of properly regulating insurance companies and the exchange. Politics and money rule and the ultimate result will be the same as the IEA: an embarrassing disaster,” the agent stated.

Editor’s Note: Do you think a new U.S-based exchange would succeed, whether in New York or Florida? What lessons should be learned from past attempts?

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