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New York to Create Global Insurance Exchange to Cover Complex Risks

Source: NY Times

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Posted on 07 Jan 2010

In a bid to create jobs and bolster New York's position as a financial center, Gov. David A. Paterson announced plans on Wednesday to create an international insurance exchange, modeled after Lloyd's of London.

The exchange would specialize in coverage of complicated risks — oil rigs in hurricane regions, tall buildings that are potential targets of terrorists or corporate directors who could be blamed for accounting scandals.

Such risks are hard to insure because they are unpredictable and potentially catastrophic. As a result, many companies go offshore for such coverage, usually to Lloyd’s or to other exchanges in Bermuda and Dublin. Currently, about 50 percent of the insurance placed through Lloyd’s originates in North America.

Governor Paterson is hoping to keep some of that business at home because insuring complex risks can be very profitable. The governor announced his plans in his State of the State address, calling it “part of a bold and decisive plan to rebuild our state’s economy.”

Officials associated with the project said they believed it could eventually generate 2,000 to 3,000 jobs, both for market participants and regulators. The exchange would be regulated by the state. It is unrelated to the Obama administration’s proposals to allow uninsured individuals to buy health coverage through exchanges.

The New York insurance superintendent, James J. Wrynn, said it would be easier for New York to create an insurance exchange than for most other states because it tried to start such an exchange in the 1980s. That attempt failed, but the laws allowing it are still on the books, Mr. Wrynn said.

He said the 1980s effort was doomed because the companies participating were not required to have adequate capital and did not always understand the risks they were taking on. The market was also “soft” then, meaning the participating insurers had a hard time charging large enough premiums to both cover their risks and turn a profit.

Mr. Wrynn said New York had been studying what went wrong with the earlier exchange and would see to it that the mistakes were not repeated. He said the state was about to start working with people from various financial institutions in the private sector to draft the rules and procedures for the exchange. Members of the working groups are to be named on Thursday.

Another crucial difference between the 1980s and now is the rise of hedge funds and other unconventional financial companies, which might want to try insuring catastrophic risks to balance investment portfolios. Such investors would participate directly in insurance syndicates, underwriting risks without having to become licensed insurers.

By forming syndicates, participants would be able to buy into relatively small slices of certain risks. The idea would be that the syndicate as a whole would have the capacity to absorb huge losses that might topple an insurance company working on its own.

In addition to hedge funds, private equity firms, banks and wealthy individuals might want to participate. Licensed insurance companies might also want to participate, officials said. If, for example, a homeowner’s insurance company decided its coverage was too heavily concentrated on the coasts of Florida, it could come to the New York exchange and seek an exchange to assume some of the risks, spreading them over a bigger pool.


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