Now is the time for a New York Insurance Exchange, writes Eric Dinallo
Planning is currently underway for reviving the New York Insurance Exchange. A “new and improved” exchange would enhance New York’s status as the world’s financial centre by increasing the flow of capital and insurance premiums into the city, generating revenue and attracting talent.
The question beckons then: why consider reviving the exchange? There are two basic reasons. One, it’s the 21st century, and a new exchange would be able to reap the benefits of new capital investments and technological advances that were unavailable to earlier exchanges. Second, the legislation that created the original exchange is still on the books, giving the Superintendent of Insurance “broad discretion” over the creation and operations of an exchange.
In a recent dinner hosted by Lloyd’s, New York Governor David Paterson echoed these sentiments. “We have private equity and hedge funds and other investment funds that might be eager to place their capital in the insurance business right here in New York,” he said.
Today, reinsurance markets are far more global and sophisticated. Non-traditional sources of capital are looking for risks uncorrelated to their portfolios.
A revived exchange could also facilitate entry and accessibility to markets – exchange syndicates would be able to provide coverage across the US free from state-by-state licensing.
Finally, the original exchange was technologically challenged – the Internet had not yet been widely introduced. A revived exchange would be able to tout real transparency for exchange participants including real time access to and use of transactional and other data. One need look no further than the recent turmoil surrounding CDS, CDO and other derivatives to appreciate the problems that a lack of both transparency and a centralised clearing house can cause.
We are not daunted by the failed attempts to establish exchanges and electronic trading platforms. Rather, the continued attempts are indicative of the need and desire to establish a new model for insurance contracts. We must assess why prior attempts did not meet with more success. There are myriad issues to explore and lessons to be learned from past attempts. By early fall, we will be forming an advisory group representing capital providers, underwriters, producers, and technical experts to do just that.
Eric R. Dinallo is superintendent of the New York State Insurance Department.