everything had gone to plan, the New York Insurance Exchange
would have celebrated its 30th birthday at the end of March
this year. The exchange opened in downtown Manhattan amid high
hopes on March 31 1980. It was set up in response to demand for
more flexible insurance cover following a capacity crisis in
the US property/casualty industry in the mid 1970s.
It was originally conceived as a reinsurance exchange and
was set up at the same time as the New York Free Trade Zone,
which allowed licensed insurers to write hard to place risks
free from rate and form restrictions.
Under legislation enacted at the end of the 1970s,
syndicates on the exchange could write reinsurance, direct
insurance on risks outside the US, surplus lines on business
from outside of New York and risks rejected by New
York’s Free Trade Zone insurers.
"The legislation that was enacted, which I remember very
clearly because I was practicing in New York at the time, I
thought was sound legislation and created the basis for a sound
platform," says Nick Pearson, partner in the insurance and
reinsurance department at Edwards Angell Palmer & Dodge in
But, from the start, the exchange had a number of things
going against it. The biggest problem was the timing, which
stunk. By the time the exchange was up and running a severe
soft market had taken hold.
"Unfortunately the timing was horrible because the market
was incredibly soft and the New York insurance exchange in
trying to put business on its books took business that in
retrospect it never should have written," says Pearson.
Don Kramer, chairman of Bermudian reinsurer Ariel Re,
recalls just how hairy the losses got in the 1980s. "I had what
a called a 5, 4, 3, 2, 1 ratio," he said at a Reactions US
business club in January. "I said if you wrote business in
1980, then you are going to have a 500% loss ratio –
or you were lying – 400% in 1981, 300% in 1982 and so
on. By 1986 it went just the opposite way. I remember in 1986
we put up about a 65% target loss ratio. With 20 years
hindsight it never developed past 28%."
The exchange never got the chance to benefit from the
resulting hard market.
It overwhelmingly wrote reinsurance. Peter Bickford, who was
vice-president, general counsel and secretary of the original
exchange and is now a consultant, says a study commissioned by
the exchange’s board in 1982 predicted that the
exchange would become an important reinsurance player with
projected premiums of $1.2bn by 1986 and $5bn by 1991.
Business did grow quickly the first few years, with the
$346m of premiums written in 1984 making it the eighth largest
reinsurer in the US by premiums. The number of syndicates grew
to 35 active syndicates by the end of 1984 from 16 when the
But in 1985 volume dropped to $310m from $345m, while loss
ratios increased rapidly. In November 1987 the writing of new
business on the exchange was suspended. A total of 50
syndicates wrote more than $1bn on the exchange.
Aside from bad timing, the exchange had calamitous
structural issues. One problem was that syndicates were backed
by US insurers who had little need for the exchange.
"At the time we didn’t have a non-traditional
insurance industry that we have today," said Kramer. "In those
days you had the big admitted companies and you had very few
offshore companies. Bermuda hadn’t yet flowered
and Lloyd’s was going through its time of
difficulties as well. So the people that joined the insurance
exchange were all the fully licensed companies that had access
to the market – it was Travelers, it was AIG, it was
INA, it was Reliance. It was all these companies and they
didn’t need the exchange. They were licensed
everywhere and the exchange had no value to them."
He adds: "My own syndicate was a Machiavellian scheme on my
part to emulate Lloyd’s. I created a corporation
that was taxed as a partnership so the underwriting losses
could be against ordinary income, which in those days was at a
higher rate. So I was trying to arbitrage the tax advantages.
None of which worked. We got clobbered."
Andrew Barile, a reinsurance consultant who worked as a
broker at the exchange, said syndicates were competing with
their own companies.
"You had a lot of friction," he recalls. "As a broker I
would bring business into that room or I could bring it out to
the street and have a competing firm that was owned by the same
parent. For instance, the AIG syndicates would compete with
AIG. You’d go to 70 Pine Street and work with them
or you would go into the exchange and you would get a different
quote from the AIG syndicates."
Barile worked at Lloyd’s before the exchange.
He says Americans never got their head around the concept of
"They had a lot to learn, it was a big learning curve for
Americans to understand the whole philosophy, especially the
ones that had never worked in London," he says. "We still had a
lot of problems in those days with following markets. They
would think that the lead is their competitor so they are not
going to follow him and don’t like him. They
didn’t have any of that kind of culture that
The market came to be seen as a dumping ground for bad
"The board members at the exchange were all the top persons
in each of these entities and they all had syndicates on the
exchange," says Bickford. "That was considered part of the
problem eventually because it was viewed by many people outside
the exchange as these big players were just using the exchange
for the risks that they couldn’t place anywhere
else. And that contributed to the undermining of the exchange
as a facility. I don’t buy into that theory
totally but there are elements of it."
Bickford charted the rise of the fall of the exchange in a
white paper he put together in 2004 called What Ever
Happened to the New York Insurance Exchange (And Why Do We
Barile says brokers tried to get their bad risks written on
the exchange, and often succeeded. "Every underwriter knows
when they open the doors on a new operation they are going to
be inundated with stuff that could never get placed in the
first place," he says. "That’s the heart of a
great broker, to say: 'Let’s go in the bottom
drawer first, take the garbage out and see if they write
Bickford says the exchange needed more stringent oversight.
In August 1986 five syndicates were declared insolvent. Five
more insolvencies followed.
"You had a situation where the reaction to syndicates
overwriting their capital ability didn’t occur,"
says Bickford. "It became clear to a lot of people that there
were syndicates that were overwriting their capital ability and
if steps had been taken to stop that from happening, by
shutting syndicates down or imposing what today would be risk
based capital requirements – those didn’t
exist then – that the insolvencies would not have
gotten to the point they got to."
The exchange may have turned out differently if it had
written a broader range of business. New York’s
insurance department is hoping that a revived exchange will
write surplus lines business as well as reinsurance. This
approach may have helped the original exchange, which
didn’t get the full authority to write surplus
lines until the end of 1982.
"By the time the exchange started getting the approval as a
recognised surplus lines carrier the tide had started to turn
so that side of it never really got going," says Bickford.
"Whether it would have made a difference or not, who knows? I
tend to think it would have because the problem with the
reinsurance business was it wrote a lot of these high end
excess treaties for nothing on the idea that those layers will
never be hit. And of course we all know what happened to those
high layers. It even happened to Lloyd’s.
"The surplus lines direct business is a much lower dollar
exposure per risk. So if it had ever got traction on the
surplus lines side it might have made a difference."
"If they had run the exchange as efficiently as
they closed it down, it never would have failed."
Peter Bickford, who was vice-president, general
counsel and secretary of the original exchange and is
now a consultant
Once things started going wrong, the exchange was quickly
shut down. Management was quick to throw in the towel. But
Bickford says not all syndicates were dong badly.
"There was a core group of syndicates that actually were
doing very well on the exchange," he says. "It is just that
when they had their problems of the insolvent syndicates they
basically folded their tent. They didn’t try to
fight for it. Those that wanted to continue were a minority
voice and didn’t have the ability to force the
board to continue the exchange."
Bickford says the syndicates that wanted to continue were
not the big name companies. They were more the entrepreneurs
and a few foreign companies that gave independence to their
managing company on the exchange.
"They were doing it he right way but there
weren’t enough of them," says Bickford. "And in
the end it was the big guys who said: 'Well, this
didn’t work. Let’s shut it
Once the exchange was closed to new business, its
liabilities were swiftly dealt with. Seven of the 10 insolvent
firms were liquidated, while three were rehabilitated under
court-approved plans. The other syndicates withdrew from the
exchange with their liabilities being moved elsewhere.
"If they had run the exchange as efficiently as they closed
it down, it never would have failed," says Bickford. "Once they
decided to close the facility at the end of 1987 they managed
to get all the facilities to withdraw having their risk assumed
by other entities, either upstreamed or by some other entities,
by about the end of 1989."
The exchange management was quick to shut operations down
and they were quick to rid itself of troubled entities.
Syndicates tried to negotiate commutations and other
arrangements with cedants to avoid liquidation, to no avail.
One idea that appeared in similar form a few years later was
"There was a proposal put forth to the court in a couple of
the insolvencies suggesting a Syndicate 101 to wall off the old
liabilities of the insolvent syndicates so that the good ones
could continue in the market, with contributions from the
security funds and so on, which in fact with variations was
what Equitas ended up being at Lloyd’s," says
Bickford. "But that was rejected by the exchange. They simply
turned everything over to the department for liquidation."
Given the short and messy life of the original exchange it
is easy to see why some are wary of moves to revive an exchange
in New York. Some may question the need to return the New York
market to a time when Michael Douglas was declaring 'Greed is
good’ as Gordon Gecko in Wall Street.
However, just as Douglas is reprising that role this summer
in Wall Street 2, it seems another comeback after many years
may be possible. The result could be the rebirth of the New
York insurance market as a hub for business.
In the 1980s New York’s financial district was
populated by many insurance firms. But since the exchange shut
down most left, either through acquisitions or moving to
neighbouring states and even further afield.
"When I first started to practice in the late 1970s,
downtown New York still had a fair number of insurance
companies headquartered there," says Pearson, "which is why I
think it would be really interesting if the exchange did
function from a single building and had underwriters available
and the brokers could go around and get their risks signed up.
I think it would be a great thing."
Ken LeStrange, chairman of Bermudian insurance and
reinsurance firm Endurance, also worked in New York then.
"When I started working in New York in 1980 down on William
Street, it was an insurance neighborhood, similar to what we
see in Hamilton in Bermuda and the City in London," he told
Reactions. "Within a few blocks there were dozens of insurers
and reinsurers. While it wasn’t a market per se,
it functioned as a marketplace because there was a lot of
talent and a lot of capital in a tight geography. So if one
were to replicate that in downtown or midtown New York City, it
certainly would be good economically for the city as it would
draw people back that have been dispersed into the three states
"So for certain types of risk that are really talent
intensive, an insurance exchange would be good economically for
By Michael Loney - firstname.lastname@example.org
READ THE REST OF THE SPECIAL REPORT
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