By Phil Zinkewicz
The Illinois Insurance Exchange stands apart from other insurance exchanges that started up in the last 15 years or so, in one respect--it is still in existence. The now-defunct New York Insurance Exchange (NYIE), approved by the New York legislature in the late '70s, fell victim to an extended soft market and mismanagement, and the Insurance Exchange of the Miamis met its demise for a number of other reasons which need not be discussed here. But the Illinois Exchange lives on and, according to its new chief executive, presents significant opportunities for insurance agents.
"The Exchange is in the process of re-examining the role of the agent or broker who is involved in the marketplace," says James E. Tait, chief executive of the Illinois Exchange. "In the past, brokers were affiliated with syndicates on the Exchange. They were, in a sense, captive brokers. We need to revise the concept of the Exchange broker to accommodate independent producers, to complement the concept of the captive broker."
This new approach comes at a time when the Illinois Insurance Exchange is undergoing a metamorphosis. The marketplace has received some bad press lately as the result of three syndicate insolvencies. But Tait believes the Exchange enjoys opportunities for growth in a new financially oriented insurance environment, in a new and more beneficial relationship with the state's department of insurance and in a new thrust towards globalization.
"The Illinois Exchange has always been a specialty market, unlike the New York and Florida exchanges," says Tait. "Therefore, the excessive competition of the early years did not affect us in the same way as the other two exchanges. Also, the early leaders of the Illinois Exchange did allow the market to grow slowly, and that was right for the times. But now, times have changed and we're ready for the next step in the evolutionary process."
But the question must be asked: How can the Exchange, as a specialty market, grow at a time when standard companies are taking on more "specialty" type risks and moving them away from specialty lines carriers? It is a fact that many standard carriers are taking what used to be called "exotic" risks and, under special programs, moving them into the regular marketplace.
Answers Tait: "There is no doubt that standard companies' movement into `niche' marketing has hurt the Exchange as well as other specialty carriers. All that means, however, is that we have to take stock of the competitive marketplace and re-invent the wheel, so to speak, in terms of offering more value-added products. In the next 10 years, our activities will be markedly different than in the last 15 years. If you look at the early years, the players in the Illinois Insurance Exchange were mostly the large insurance companies. When the market turned, a substantial number of those large insurers withdrew, offering opportunities for entrepreneurs to come in.
"Now, there are a large number of agents, producers, and MGAs who are looking for a forum to participate in the underwriting profits. We believe that the Exchange's future will be affected by economic changes that are taking place, including the trends in the industry towards securitization, globalization and alternative risk mechanisms." Tait noted that, thus far, the trend towards securitization has taken place in the insurance industry largely in the area of catastrophe risks, with firms such as Morgan Stanley and Merrill Lynch actively putting together financial vehicles to provide protection for catastrophe exposures. However, Tait maintains that the trend toward securitization will gradually move into other lines of insurance.
"Those involved in the securitization movement are just going through the learning process right now," says Tait. "But there is no question that the trend will grow and the industry will be dealing with more financial-type products."
The globalization of insurance will also be beneficial for the Exchange, according to Tait. "Right now, there are a number of `special purpose vehicles' as they are called in the world--two in the Cayman Islands, two in Barbados and one in the Channel Islands--set up for the purpose of providing catastrophe cover. There is no reason why the Illinois Exchange can't provide a forum for those types of vehicles."
The big question is whether the Exchange, in order to grow, will be able to attract enough investors, given the recent negative publicity the Exchange has received.
"First, it must be remembered that the three syndicates that went under had individual problems that were in no way related to the core of the Exchange," says Tait. "In one insolvency, the circumstances surrounding the syndicate's problems were related to poor investment practices. In another case, the syndicate was negatively affected by an unexpected court decision. The syndicate had been writing contractors liability insurance and, in the aftermath of an earthquake, the court decision changed liability cover into property cover, and so the losses sustained by the syndicate increased dramatically. In the third insolvency, it was just bad business on the books.
"However," continues Tait, "even with those insolvencies, there is new legislation in Illinois which, we believe, will provide potential new investors with an incentive to come on board."
Tait is referring to what he called "landmark legislation" which is intended to help improve the Exchange's stability and credibility in the marketplace through increased regulatory oversight by the Department of Insurance.
"This new legislation is a win-win situation for the Illinois Insurance Exchange and the Illinois Department of Insurance," says Tait. "The passage of this bill marks the bedrock to redefine and strengthen the relationship between the Department and the Exchange. The Department gains greater authority in regulating the Exchange's syndicates while we maintain our competitive edge."
Sponsored by State Rep. Frank Mautino, the legislation amends the Insurance Exchange Article of the Illinois Insurance Code and grants the Department of Insurance solvency regulation control over the Exchange's syndicates. The new amendment provides that the director of insurance shall be responsible for examining the financial records of the Exchange and related parties. The marketplace's syndicates must file quarterly statements, actuarial opinions and audited financial reports with the Department. The Exchange already files an annual financial statement with the Department.
Tait emphasizes the importance of maintaining the Exchange's "competitive edge" through the improvements in the insurance code. "There are several factors which make the Exchange an attractive option for hard-to-place risks and these will remain intact with the new law. The Exchange offers a lower cost of capital for market entry because syndicates may use letters of credit as part of their application. Market entry through the Exchange is less expensive, faster and more expansive than state-by-state applications because of the marketplace's multiple state reach," he says.
Tait also noted that the Exchange is not subject to any residual market charges and offers complete freedom of form and rate and allows syndicates to have control over their leverage ratios. "Clearly the time was right to do this and we and the Department worked together for a stronger relationship that will benefit all parties involved," he says.
Therefore, according to Tait, the Exchange offers a domicile for independent producers to participate in profits and, perhaps soon, to operate truly independently without the needed syndicate affiliation of the past. *
©COPYRIGHT: The Rough Notes Magazine, 1997