Paterson, Bloomberg And AIG Unite In Plan To Attract Insurance Investment
Skepticism about risks, viability in current climate and legislators’ willingness to agree
Wed, 27 Jan 2010 15:12:00
As talks got under way in 2007 to revive the New York Insurance Exchange—a 1980s-era marketplace for investors to buy and sell risk—Eric Dinallo, then the head of the state Insurance Department, joked, “Maybe we ought to put it on Governor’s Island.”
Like that infamous development dilemma at the mouth of the Hudson, the Insurance Exchange is an idea that has stymied the government for years.
Modeled on the centuries-old Lloyds of London, the Insurance Exchange would allow groups of investors to pool their money and buy and sell large, complicated insurance products. Currently, the bulk of these flow overseas to countries like Bermuda. Dinallo suggested that people might feel more comfortable with such a system if they knew it was located in the middle of New York Bay, some distance from the titans of Wall Street.
The sentiment indicates just how radioactive the proposal might be, especially in New York, the epicenter of the financial collapse. The legislation creating the original exchange—which fell apart only a few years after its creation—has not been updated since the 1970s, totals no more than a page or two and gives the Insurance Department broad discretion to establish its own regulatory structure.
Today’s political climate, officials admit, may be inhospitable to a plan announced by Gov. David Paterson in his State of the State address to give hedge funds and private equity managers—not to mention the much-maligned American International Group, a key player in the proposal—a place to buy and sell risk. The New York program, officials say, would carve out its own distinct niche, focusing on insurance and reinsurance in areas such as terrorism, cyber security and the environment.
The proposal has become a favorite of Paterson and his aides, who see it as a way to demonstrate the concrete steps they are taking to keep New York “the center of the universe,” as Cecilia Norat, an executive at AIG who has worked on the plan, put it.
New York City Mayor Michael Bloomberg has also been brought on board, officials said, after talks with James Wrynn, the state superintendent of insurance. During those discussions, Bloomberg expressed support for hosting the exchange on Wall Street.
Prominent insurance executives, such as John Doyle of Chartis U.S., formerly a division of AIG, have also been in talks with state officials.
“Even though AIG has gone through a tough last 15 months, there’s no question in my mind that we are the masters of those complicated covers,” Norat said, referring to the complex insurance trades that the exchange would specialize in. “Because, in many instances, we actually created the stuff.”
Executives at companies like AIG have also told the Insurance Department that, because the tax climate in places like Bermuda makes it so advantageous to conduct business overseas, the industry would like to see some sort of preferential tax treatment before agreeing to put up capital.
“We’re looking into that,” said Maria Filipakis, the Insurance Department’s senior counsel and lead official on the exchange plan, who confirmed she has been in talks with members of the state’s congressional delegation about creating a federal tax incentive for the program.
“This really has to be industry-driven,” Filipakis said.
But even insurance industry executives admit that getting Congress to approve a new tax incentive for Wall Street investors, who have been politically toxic to lawmakers in New York and D.C., is unlikely, and that the Insurance Department will have to find ways of making the exchange attractive to companies without those benefits.
“They don’t give preferred tax treatment to anybody these days,” said Ellen Melchionni, president of the New York Insurance Association. “I think some changes are going to need to be made if this is going to be a true success this time around.”
One of those changes, officials say, will have to do with the regulatory environment in New York. Insurance Department officials say the 1970s statute gives them broad authority to regulate the exchange themselves, without having to seek legislative oversight or a new statute mandating additional rules. Filipakis said the Department is debating whether to create a separate regulatory authority, under its own purview, or a self-policing body funded and administered by the investors themselves.
State lawmakers say they will insist on a comprehensive regulatory structure, even if the Insurance Department does not seek legislative approval.
“I don’t think there’s any question that they would need to create a new regulatory environment for the exchange,” said Joe Morelle, chair of the Assembly Insurance Committee. “The question of whether there’s too much discretion in the statute for the department is one that we will certainly look at and review.”
Dinallo, the former Insurance superintendent who is now running for attorney general, said that creating the conditions for insurance investments to flourish in New York was in the state’s long-term economic interest—regardless of how politically toxic it may be.
“People need to see the long view, and we’re getting no money,” Dinallo said of the current insurance market. “So why not make a special tax rate for something that we’re not otherwise getting money for?”
Like that infamous development dilemma at the mouth of the Hudson, the Insurance Exchange is an idea that has stymied the government for years.
Modeled on the centuries-old Lloyds of London, the Insurance Exchange would allow groups of investors to pool their money and buy and sell large, complicated insurance products. Currently, the bulk of these flow overseas to countries like Bermuda. Dinallo suggested that people might feel more comfortable with such a system if they knew it was located in the middle of New York Bay, some distance from the titans of Wall Street.
The sentiment indicates just how radioactive the proposal might be, especially in New York, the epicenter of the financial collapse. The legislation creating the original exchange—which fell apart only a few years after its creation—has not been updated since the 1970s, totals no more than a page or two and gives the Insurance Department broad discretion to establish its own regulatory structure.
Today’s political climate, officials admit, may be inhospitable to a plan announced by Gov. David Paterson in his State of the State address to give hedge funds and private equity managers—not to mention the much-maligned American International Group, a key player in the proposal—a place to buy and sell risk. The New York program, officials say, would carve out its own distinct niche, focusing on insurance and reinsurance in areas such as terrorism, cyber security and the environment.
The proposal has become a favorite of Paterson and his aides, who see it as a way to demonstrate the concrete steps they are taking to keep New York “the center of the universe,” as Cecilia Norat, an executive at AIG who has worked on the plan, put it.
New York City Mayor Michael Bloomberg has also been brought on board, officials said, after talks with James Wrynn, the state superintendent of insurance. During those discussions, Bloomberg expressed support for hosting the exchange on Wall Street.
Prominent insurance executives, such as John Doyle of Chartis U.S., formerly a division of AIG, have also been in talks with state officials.
“Even though AIG has gone through a tough last 15 months, there’s no question in my mind that we are the masters of those complicated covers,” Norat said, referring to the complex insurance trades that the exchange would specialize in. “Because, in many instances, we actually created the stuff.”
Executives at companies like AIG have also told the Insurance Department that, because the tax climate in places like Bermuda makes it so advantageous to conduct business overseas, the industry would like to see some sort of preferential tax treatment before agreeing to put up capital.
“We’re looking into that,” said Maria Filipakis, the Insurance Department’s senior counsel and lead official on the exchange plan, who confirmed she has been in talks with members of the state’s congressional delegation about creating a federal tax incentive for the program.
“This really has to be industry-driven,” Filipakis said.
But even insurance industry executives admit that getting Congress to approve a new tax incentive for Wall Street investors, who have been politically toxic to lawmakers in New York and D.C., is unlikely, and that the Insurance Department will have to find ways of making the exchange attractive to companies without those benefits.
“They don’t give preferred tax treatment to anybody these days,” said Ellen Melchionni, president of the New York Insurance Association. “I think some changes are going to need to be made if this is going to be a true success this time around.”
One of those changes, officials say, will have to do with the regulatory environment in New York. Insurance Department officials say the 1970s statute gives them broad authority to regulate the exchange themselves, without having to seek legislative oversight or a new statute mandating additional rules. Filipakis said the Department is debating whether to create a separate regulatory authority, under its own purview, or a self-policing body funded and administered by the investors themselves.
State lawmakers say they will insist on a comprehensive regulatory structure, even if the Insurance Department does not seek legislative approval.
“I don’t think there’s any question that they would need to create a new regulatory environment for the exchange,” said Joe Morelle, chair of the Assembly Insurance Committee. “The question of whether there’s too much discretion in the statute for the department is one that we will certainly look at and review.”
Dinallo, the former Insurance superintendent who is now running for attorney general, said that creating the conditions for insurance investments to flourish in New York was in the state’s long-term economic interest—regardless of how politically toxic it may be.
“People need to see the long view, and we’re getting no money,” Dinallo said of the current insurance market. “So why not make a special tax rate for something that we’re not otherwise getting money for?”
