Some 75% of Fortune 500 companies have captive insurance companies, but a key challenge has always been efficiently reinsuring captives' risks, with the options mostly limited to Lloyd's of London or reinsurers based in Bermuda. Now the New York State Insurance Department, in an initiative promoted by Gov. David Paterson, hopes to change that by resurrecting a commercial insurance exchange first launched in the 1980s. That initial attempt failed because it didn't attract enough capital.
"This isn't a done deal yet," admits Michael Moriarty, deputy superintendent for property and casualty markets at the New York Insurance Department (NYID). "But we've been talking with hedge funds and private investment funds, and they like the idea of having a way to invest in insurance risk, which is not correlated with capital markets.
"We envision this exchange to be an exclusively high-end market, at least at the beginning," adds Moriarty. "It wouldn't be selling auto or health insurance, although companies that offer that kind of insurance could reinsure on the exchange."
He says the exchange would not compete directly with Lloyd's, but adds, "The U.S. represents 50% of Lloyd's underwriting business, so we're trying to give large corporations an option of staying in the U.S., and not having to go overseas to reinsure or to insure certain risks."
While hedge funds, insurers and brokers are reportedly working with the Insurance Department to revive the exchange, the plan has its skeptics.
"While it's always good to have new sources of capacity for different risks, it seems to me there's too much capital in the market right now," says Dennis Harwick, president of the Captive Insurance Companies Association.
"Normally, you set up an exchange when there's a shortage of capacity, but that's not the case right now," agrees Advisen CEO Tom Ruggieri. "I've still got a ton of questions and no answers regarding this plan."
But Scott Clark, secretary of the Risk and Insurance Management Society, says he has "high expectations" for an exchange. "For those entities that have set up captives, it will offer another avenue for insuring their risks."
Captives are always searching for capacity, says Garry Coulter, executive vice president of captive insurer USA Risk Group. "But in order to be truly useful, this exchange would have to gain rating and state regulatory acceptance. It would have to address sectors where there is a real need, such as wind, earthquake and D&O risks, and it would have to demonstrate long-term commitment, through bipartisan support of the New York State legislature."