NYIE, Take Two

Technology will play an important role in helping the proposed New York Insurance Exchange succeed where its early-1980s predecessor failed.

The original New York Insurance Exchange (NYIE) opened for business on March 31, 1980. History, though, tells us that it would have been more fitting if the exchange had opened the next morning - on April Fools' Day. Hindered by a soft market and inadequate capital, among other issues, the exchange disbanded in late 1987.

More than 20 years later, however, the state of New York is set to give the exchange new life. In his 2010 State of the State address, New York Governor David A. Patterson announced plans to create a new NYIE as part of a broader plan to help rebuild the state's struggling economy. "By bringing together the buyers and sellers of complex commercial insurance, the exchange will reaffirm our status as the focal point of international trade and finance," Patterson said. "It will also curtail the types of transactions that were unregulated that decimated the global economy."

According to the governor's office, the NYIE will be modeled after Lloyd's of London, a London-based insurance market composed of underwriting syndicates and brokers that specializes in complicated, hard-to-price risks. "Groups of investors, such as hedge funds, private equity funds, investment banks and traditional insurance companies, would come together to form syndicates and become members of the exchange," a fact sheet provided by the governor's office says. "Brokers would then bring large property or reinsurance risks to the 'floor' of the exchange to seek bids from investors to take on the risk."

Andrew Barile, CEO of Andrew Barile Consulting Corp. (Rancho Santa Fe, Calif.), worked for Lloyd's ($29 billion in 2008 gross written premium) early in his career and also helped start one of the larger brokerages on the original NYIE. He says the NYIE should be successful this time around. "We've learned from our many mistakes, and now it's a different time," he notes.

For one thing, the U.S. insurance industry has started to produce a new generation of underwriting executives who come from the same mold as Lloyd's of London syndicate underwriters, Barile says. "Most of insurance underwriting in [the 1980s] was done by committee as opposed to by individuals," he recalls. "The key to Lloyd's success has always been that the individual underwriter makes all the decisions."

In addition, the advent of hedge funds could provide the exchange with sufficient capital. "We now have hedge fund entrepreneurs who have raised billions of dollars in capital that has to be put at risk, so we have the ability to generate syndicates," Barile explains. "One of the biggest weaknesses of the New York Insurance Exchange the last time around was that it didn't have enough capital to stay in the business."

A Strong Tech Foundation

Creating a technology infrastructure will be key to the success of the new NYIE, according to observers. "Typically the technology challenges of such an exchange would include the need to assure the participants that their transactions will be handled securely and that all data will be maintained so as to achieve the goals of full confidentiality, integrity and availability," explains Bill Hartnett, GM of Redmond, Wash.-based Microsoft's insurance solutions group. "The technology also must be capable of handling large volumes of transactions while still applying regulatory controls in real time."

To compete with traditional insurance companies and accomodate brokers that are operating on a global basis, it's important that the exchange has modern technology, adds Barile Consulting's Barile. Up-to-date catastrophe modeling capabilities and financial and accounting applications also will be important pieces of the exchange's IT environment, he says.

Coupled with better access to data, the right technology could help the NYIE succeed where it previously failed, Barile continues. "Access to data, access to underwriting information - it all goes into the decision-making process," he says. "The underwriters can basically put you out of business - if their risk selection isn't properly done, ... the losses will exceed the premiums. This time around, though, it's possible to provide the underwriter with enough information about a particular risk in a short time frame."

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