Fleshing out the broad concept, Insurance Commissioner James Wrynn said in a conference call that the insurance exchange would operate like the venerable Lloyd's of London, where syndicates of insurers bid to take on big - or unusual - risks such as the World Trade Center, which turned into a debacle when insurers refused to pay the owner, Larry Silverstein, after the Twin Towers collapsed in the 2001 terrorist attack.
Wynn also hinted that he hopes the New York exchange, which would be largely electronic and have a back office in upstate New York, would be a lot more efficient than Lloyd's, which has long drowned in paperwork.
Wrynn said the New York exchange would be both a "competitor and a compliment" to Lloyds. But standardized forms and electronic contracts, if they work, would obviously give the U.S. a leg up on the archaic British system. The key would be to find capital providers, big capital providers, because the exchange, in addition to members, will need to set up a "central guarantee fund" that will ensure claims are paid even if individual insurers go bankrupt.
And that could happen. Wrynn cited several areas where big and complex risks would have to be swallowed by insurers in the future, including climate change and cyber terrorism. A biological or nuclear attack on a major city could cause as much as $750 billion of insured damage, experts say.
Key players, in addition to the insurers themselves, would be Wall Street hedge funds and private equity firms, as well as "wealthy individuals" seeking an alternative to stock market risk, said Wrynn.
Wrynn gave credit for the exchange idea to his predecessor, Eric Dinallo, who left office last summer to run for New York attorney general. But Wrynn noted that the city had an insurance exchange more than 30 years ago which failed because of a soft market and because its backers bailed.
"Capital markets have improved since then," he said. And, he might have added, the risks have also gotten bigger.