New York Insurance Exchange revival plans move ahead

By added on 20/09/2010

Officials who are seeking to revive the New York Insurance Exchange may be moving away from earlier discussions of favourable tax treatment for participants, according to preliminary recommendations that indicate what shape the facility may take.

Investment News reports that officials from the industry and the New York State Insurance Department have begun to work on a business plan for the potential revival of the exchange.

Observers said the exchange would be a Lloyd's of London-style marketplace for insurance buyers and capital providers. The original New York Insurance Exchange operated from 1980 to 1987, when it closed due to inadequate capital, poor claims experience, soft market conditions and other factors.

In 2008, Eric Dinallo, then the state insurance superintendent, proposed reviving the exchange, and his successor, James J. Wrynn, has expressed enthusiastic support for the plan since taking office last year.

Seven working groups consulting the New York State Insurance Department issued a set of preliminary recommendations, which were presented to the department in June.

Members of the working group on taxes said that they were “not sold” on favourable tax treatment being critical to the exchange. Previously, department officials said that the exchange might need tax advantages to compete with offshore reinsurers in Bermuda, Ireland and elsewhere.

“The NYIE is unlikely to differentiate itself from its competitors through a more favourable tax regime,” the working group wrote in a presentation document. “Bermuda already has a very favourable tax regime and is still losing business to Ireland ... The example of Ireland demonstrates how important an attractive regulatory and market access value proposition can be.”

The picture painted by the working groups' preliminary recommendations is of a virtual marketplace with advanced technology to facilitate transactions and a minimal bricks-and-mortar operation. The exchange would focus on commercial insurance, including casualty and excess-and-surplus-lines coverage, as well as reinsurance, according to the preliminary recommendations of the working group on markets.

The working groups' recommendations describe a self-regulating marketplace made up of well-capitalized syndicates.

The value to insurers and capital providers would be cost and regulatory efficiencies, along with access to a 50-state marketplace. A one-stop shop with access to all U.S. states could reduce insurers' frictional costs, eliminate regulatory redundancies and simplify tax allocations, the preliminary recommendations contend.

“Key competitors — Bermuda [and] Lloyd's of London — have a structural disadvantage relative to a US-based location,” according to the presentation.

The working group also listed disadvantages that a revived New York Insurance Exchange would have, such as the stringent capital requirements in some states, which could discourage participation. The presentation also recommended that department leaders consider seeking expansions in New York state law authorizing the exchange.

The preliminary recommendations stress the importance of stringent capital requirements and outline potential procedures for careful and frequent monitoring and regulation of the exchange's syndicates. Many observers think that the last exchange failed because it was undercapitalized.

Francine L Semaya, a Middletown, NJ-based legal consultant and a member of the regulatory working group, said that syndicates would have to comply with relevant state laws. She added, however, that the exchange would allow insurers to operate with fewer rate- and form-filing requirements.

“They're going to make it user-friendly,” she said.

Industry participation is crucial, said Peter H. Bickford, a New York-based attorney and insurance consultant who was general counsel for the original exchange and is advising the department on the new exchange.

The working groups recommended that the department develop a business plan for the exchange, develop cost savings estimates and determine the feasibility of gaining access to all states. Observers said that the department could release more information next month.

“There's definitely progress being made,” Mr Bickford said.