Technology Issues Related to the Proposed New York Insurance Exchange – thoughts from Jeff Jinnett

New York State is currently considering the creation by 2011 of a new insurance exchange. It would be based in New York City and would be designed to complement the existing Lloyd’s of London insurance exchange for the placement of reinsurance and insurance for complex risks usually covered under surplus lines insurance policies. As has been reported:

“The New York insurance superintendent, James J. Wrynn, said it would be easier for New York to create an insurance exchange than for most other states because it tried to start such an exchange in the 1980s. That attempt failed, but the laws allowing it are still on the books… He said the state was about to start working with people from various financial institutions in the private sector to draft the rules and procedures for the exchange. ” [click here for the full NY Times article]

Certainly, there are important financial incentives for New York State to support the creation of such an exchange, such as job creation and expansion of the tax base. Reportedly half the money that goes to Lloyd’s of London comes from the United States, and this could be channeled into the New York Insurance Exchange. [Click here for more information.]  A number of workgroups have been formed to advise the New York State Insurance Department on regulatory oversight, tax, capitalization, multi-state issues and markets, and importantly operations and technology. Superintendent Wrynn has advised the operations and technology sub-group that he wishes the insurance exchange to have an advanced technology platform, standardized forms, contract certainty and expeditious claims handling.  [See “New York Working to Re-establish the New York Insurance Exchange” (Client Alert, Locke Lord Bissell & Liddell, February 10, 2010)]   It has been reported that “[a]nother crucial item would be the creation of improved technology and underwriting criteria, so participants could have a better understanding of risk…. ”   [One issue is the possible need for tax breaks or other incentives that would encourage foreign and domestic firms to participate in the market.  Here is an example. - JJ]

Establishing an insurance exchange is never an easy task. The Council of Insurance Agents & Brokers (CIAB) and Lexis recently announced the creation of an insurance exchange pilot (with full production scheduled for 2011) which will concentrate on ACORD-supported commercial lines.   This initiative built on an earlier effort in 2006 by CIAB, Superior Access, ChoicePoint and Pequot Ventures to create an insurance exchange . Other exchanges exist for specialty insurance products, such as life settlement policies (e.g., the Cantor Fitzgerald LexNet exchange ).  In each case, establishing an exchange typically is a coalition effort and not the product of a single party’s efforts. Forming such a coalition requires time for reaching a consensus on business goals and priorities, appropriate technology platform solutions and financial support during the development phases.  In addition, the creation of the New York Insurance Exchange might need the approval of the National Association of Insurance Commissioners (NAIC) in order to be viable nationwide. [Click here for more information.] 

Perhaps most critical, however, are the technology issues. As Microsoft’s own Bill Hartnett advised in a recent interview:

"A solid technology platform will be critical to success," says Bill Hartnett, general manager of Redmond, Wash.-based Microsoft's insurance solutions group …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…The technology also must be capable of handling large volumes of transactions while still applying regulatory controls in real time. "  [Click here for full article]

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