Following the McCarren-Ferguson Act of 1945, the states were charged with regulating insurance. State regulation of insurance, in turn, led to standardized policy forms and rates which, while fine for a substantial portion of the insurance market, by no means fit all.  By the late 1970’s, a hard insurance market demanded greater competition and flexibility. As a result of consumer need for broader insurance markets and flexible policy forms, many potential insureds sought coverage from overseas Lloyd’s-type markets. In an attempt to address consumer needs and keep both capital and premiums in the United States, in 1978 the New York State Legislature created the New York Insurance Exchange,[1] and authorized the drafting of the New York Insurance Exchange’s governing documents - its Constitution. The Constitution was finalized in 1979. In essence, the New York Insurance Exchange was to be a self-governing, centralized insurance marketplace. Initially, it acted essentially as a reinsurance marketplace.

 

The New York Insurance Exchange was intended to be a Lloyd’s-type centralized market for the brokering and underwriting of insurance risks and to facilitate the underwriting of reinsurance. Insurance Law §6201 outlined the broad scope of the new insurance market:

 

      (b) The purposes of the exchange shall be:

      (1) to provide a facility for the underwriting of:
      (A) reinsurance of all kinds of insurance;
      (B) direct insurance of all kinds on risks located entirely outside the United States;
      (C) direct insurance of all kinds on risks located in the United States other than in this state,  provided that  such risk qualifies for placement pursuant to the excess and surplus lines requirements of the    jurisdiction in which the risk is located; the superintendent may permit the exchange or its syndicates, or both, to take such steps as may be necessary to qualify as an excess and surplus lines insurer in such jurisdiction;
      (D) risks which shall have been submitted to and certified as having been rejected by a committee representative of insurers licensed by the superintendent under article sixty-three of this chapter, subject to conditions imposed by the superintendent pursuant to regulation; and

(2) to manage the facility authorized by this article, in accordance with regulations promulgated by the superintendent.

 

The New York Insurance Exchange opened its doors on March 31, 1980. Member brokers could submit business to underwriting members (known as syndicates). Only member brokers could submit business through the exchange, and syndicates were allowed to conduct insurance business only on the exchange. On opening date, there were 16 separate syndicates, and eventually 50 syndicates wrote business on the Exchange before it closed in 1987. Syndicates are not traditional insurers, but rather are persons or entities that essentially buy risk. All business was processed through the Exchange facilities, and there was a centralized trading floor. 

 

According to Peter H. Bickford, former Vice-President and General Counsel to the New York Insurance Exchange[2], the Exchange presented several features unique to exchange markets. First, all business was to be conducted at the exchange, on the centralized trading floor. Second, while several syndicates could back the same risk, each was only liable for its own percentage of participation (several liability). Third, it was a brokers’ market – only member brokers could place business on the Exchange. Fourth, all transactions were processed by the Exchange, ostensibly given it oversight and control over the health of the marketplace. Fifth, unlike traditional insurance companies, the Exchange was self-regulating. It operated according to its Constitution, and set rules for its members. Sixth, the Exchange maintained its own security fund. The security fund was a separate entity from the Exchange, with its own charter, by-laws and directors. Syndicates were required to contribute to the security fund. The security fund was obligated to pay the contractual obligations of liquidated syndicates.

 

Initially, the Exchange was successful. According to various reports, by 1984, there were thirty-five active syndicates on the Exchange, and more than one hundred active brokers. According to Bickford’s 1986 article, the question of whether an insurance exchange market would work in the U.S. had “been resolved by the remarkable success of the New York Insurance Exchange in its five year existence.”[3]  Indeed, by 1986, the Exchange was writing $1.2 billion in premiums.

 

The Exchange’s position in the insurance market began to be undermined as the tight market that demanded its creation in the 1970’s loosened in the early 1980’s and had disappeared by later that decade. Some reports indicate that the Exchange began to be viewed as a market for undesirable risks, uninsurable anywhere else. Many syndicates began to write business over their guideline capacity and were under-capitalized for the risks they had written. The centralized market that ostensibly was overseeing the market and ensuring its health was overburdened an back-logged by the sheer volume of business. By 1985, the Exchange’s business had begun to decline.

 

Several syndicates were placed under joint control with the Exchange, and eventually, declared insolvent by the Exchange Board of Governors. The Exchange began to petition the New York State Superintendent of Insurance to liquidate the insolvent syndicates. As a result of the insolvencies, the remaining syndicates were called on to increase the security fund. As a result of the security fund’s actions, most syndicates sought to voluntarily withdraw from the market. By November 1987, the remaining Exchange members voted to suspend the writing of new and renewal business on the Exchange. The New York Insurance Exchange had stopped functioning.

 

After the Exchange closed, many of the Exchange members were able to use commutations and reinsurance to avoid formal liquidation. Some were liquidated. The security fund’s funds were not distributed to until 1985, almost twenty years after the Exchange closed its doors.

 

Recently, there is substantial interest in re-opening the New York Insurance Exchange. As the 300-plus years of the London market has shown, independent insurance markets are necessary, and can be both profitable and self-sustaining. Notably, Article 62, creating the Exchange and authorizing its operations, is still on the books. In New York Governor David A. Patterson’s January 2010 State of the State address, he announced places to create a new Exchange to help rebuild New York’s struggling economy:

 

By bringing together buyers and sellers of complex commercial insurance, the exchange will reaffirm our status as the hub of international trade and finance and it will also curtail the unregulated transactions that devastated the global economy.  New York was the epicenter of so much that went terribly wrong in 2008.  It is our responsibility as New Yorkers to lead in the rebuilding and reform of these vital global markets.

 

On February 10, 2010, James Wrynn served on a panel which addressed a group of London Market insurance executives at the invitation of the Insurance Insider. The other panel members were Tom Bolt, Lloyds’ Underwriting Performance Director, Joe Plumeri, CEO of Willis, and Martin Albers, Head of Client Markets Europe for Swiss Re.

 

As anticipated, Mr. Wrynn discussed the possible re-emergence of a New York Insurance Exchange. In introducing the concept, Mr. Wrynn noted that he wants the New York Insurance Department to serve as facilitator for agents and brokers. As part of this agenda, he is seeking to streamline the process for filing and approval of insurance forms.

 

Mr. Wrynn acknowledged that given the past failure of the New York Insurance Exchange, he faces challenges. Nevertheless, he believes that there in view of the traditional role which New York State has placed in the United States as a port of entry for foreign reinsurers and excess and surplus lines insurers, he believes that the Exchange could serve a role for the industry in addressing new and emerging risks. He emphasized that the planning process is being informed by the missteps of the former Exchange, and that the working groups are comprised of individuals with intimate working knowledge of the past Insurance Exchange.

 

Initially, the concept of a new Insurance Exchange was to serve as one of several platforms available to the insurance industry which would feature flexibility. Through the feasibility and planning process, the concept has evolved. Mr. Wrynn indicated that he intends to use Lloyds’ as a blueprint for the platform, and has involved various members of Lloyds on steering committees and in working groups who continue to investigate the feasibility of a New York Insurance Exchange. The operational features would include technological advancements, standardization of forms, contract certainty and a claims protocol which would require prompt payment of claims but which would also include a claims resolution process.

 

It is clear from Mr. Wrynn’s comments that if indeed a New York Insurance Exchange is created, this will not be accomplished overnight. Rather, there is a process in place to assess the viability of the Exchange and what features would be needed to offer value to the insurance industry. Presently, working groups are scheduled to report back with ideas in April of this year. Preliminary recommendations will be made in June, and it is anticipated that a proposed action plan will be developed in September 2010.

 

One of the means by which Mr. Wrynn envisions a new Insurance Exchange providing value to the industry and consumers is through the use of technology to collect data, and ultimately, to establish performance measures and benchmarks for member insurers.

 

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[1] The New York Insurance Exchange was created by Insurance Law 425-a (1978), now known as Article 62.

[2] Peter H. Bickford, Regulation of Insurance Exchanges, 21 Tort & Ins. L.J. 255 (Winter 1986); Peter H. Bickford, What Ever Happened to the New York Insurance Exchange (and Why Do We Care)? (November 2004).

[3] See Bickford, Regulation of Insurance Exchanges, supra note 2 at 255.