Critical Issue Report

Déjà all over again?

New York insurance department considers reviving ill-fated 1980s
New York Insurance Exchange

By Phil Zinkewicz

A great many humorous sayings are attributed to Yankee great Yogi Berra. Once, while driving to Cooperstown with some team members, he supposedly said: “I know we’re lost, but we’re making good time.”

Here are a few other quips attributed to Yogi:

“You better cut the pizza in four pieces because I’m not hungry enough to eat six.”

“When you come to a fork in the road, take it.”

“The future ain’t what it used to be.”

“I knew I was going to take the wrong train, so I left early.”

“Nobody goes there any more; it’s too crowded.”

We’ve used the word “attributed” here because Yogi himself said: “I never said most of the things I said.” Of course, the most famous Yogi quote is: “It’s just like déjà vu all over again.”

Last year, the New York Department of Insurance announced that it wants to resuscitate the long-dead New York Insurance Exchange (NYIE), and apparently the idea has Governor David Paterson’s blessing. The law that created the original NYIE is still on the books, so a rapid revival is not impossible. However, for those of us who have been writing about the insurance industry for enough years, it’s just like déjà vu all over again.

The NYIE opened in 1980 amid a great deal of hoopla. Proponents of the Exchange hailed it as the U.S. answer to Lloyd’s of London—as David challeng­ing the Goliath Lloyd’s market. The Exchange’s offices were located at the corner of William and Fulton Streets in lower Manhattan and, in imitation of Lloyd’s, the Exchange had boxes where under­writers sat and were approached by brokers who were eager to place business in this new market.

Andrew J. Barile, CEO of Andrew Barile Consulting Corp., remembers the NYIE with some fondness. “My office in the 1980s was three doors down from the New York Insurance Exchange. It was a broker’s dream since a room filled with syndicate underwriters was within walking distance. Having worked at Lloyd’s earlier in my career, I recognized the importance of face-to-face insurance negotiations.”

But that’s where the similarity to Lloyd’s ended. Lloyd’s was capitalized then by individual investors, affluent people with landed estates and private planes and yachts who recognized the worth of the market’s then nearly 300-year history. The NYIE was capitalized primarily by insurance companies and large alphabet brokers, some of which are no longer around. In other words, the Exchange didn’t represent new capital coming into the insurance industry. It was just a shift of money from one pocket to another.

Moreover, Lloyd’s had a history at that time of sound underwriting principles and fair claims pay­ment practices. All the NYIE had was youth and arrogance. True, Lloyd’s a decade later was to encoun­ter its own difficulties, which almost tore down the marketplace. And, if the NYIE had survived into that decade, perhaps it could have capitalized on Lloyd’s problems. However, the Exchange lasted just seven years before it limped away into darkness.

In addition to the problems mentioned above, the NYIE opened its doors during a soft market of unpre­cedented intensity and duration. In the early 1980s, interest rates were soaring. Banks were offering certificates of deposit with yields of up to 15%. Insur­ers, eager to take advantage of those interest rates, began writing any and all business, and cash flow underwrit­ing became rampant. Competition for new premium dollars became fierce and the Exchange, determined to grow, was swept up in the insanity.

Furthermore, to safeguard their own business operations, some insurers and brokers kept the cream of the business being written for themselves and used the NYIE as a dumping ground for the worst risks. When the market turned in the mid-1980s, the Exchange was overbur­dened with bad business and losses were mounting. By 1987, the Exchange was gone.

That was then; this is now

Today’s situation is different from that of the 1980s. We are in a high-tech global economy whose fluctuations influence every decision we make. Today, competition in the insurance business is not the result of high interest rates but rather of an economy that is not allowing premium dollars to flow. Individuals and commercial interests are taking higher deductibles to trim their insurance costs and in some cases going bare. Unemployment has hit insurers hard in the area of workers compensation. A faltering stock market has hurt insurers’ investment income. So insurers must compete, and as a result the market remains soft.

Albeit for different reasons, this is exactly the climate that existed when the New York Insurance Exchange opened its doors in 1980. Do we really want history repeating itself, with competitive insurers using Exchange syndicates as a dumping ground for bad business? Barile, a proponent of a new NYIE, suggests that it might be wise to use 2010 to prepare for an Exchange opening in 2011 when some industry pundits are predicting a turnaround.

What’s more, Barile correctly asserts that capital for Exchange syndicates must come from sources outside the insurance business such as hedge funds and private investment firms. He adds that the new Exchange must be truly global in nature if it is to compete seriously with Lloyd’s and other international markets.

Says Barile: “The lessons learned from the 1980s New York Insurance Exchange must be taken into consideration. The insurance risk, priced properly and adequately, can produce an underwriting profit. The cost of insurance products sold must be commensurate with the risk taken.

“The Lloyd’s model can be duplicated with the concept of pricing freedom and coverage flexibility,” Barile continues. “Technology of today provides the global environment necessary to have an international insurance marketplace. Producers of insurance business would have the necessary financial resources to develop risks all over the world.”

If the New York Insurance Depart­ment and Governor Paterson recognize the pitfalls that destroyed the original Exchange and are approaching this new incarnation with the intention of eliminating those pitfalls, all well and good. However, if they are just looking for a way to create new tax dollars (which admittedly New York desperately needs) and do not have a plan to go forward intelligently, the new Exchange will probably be doomed to fail again.