Last year, insurance brokers in the United States added some $2.3 billion worth of premiums to the coffers of Lloyd's of London. The Americans had to share commissions with their counterparts in Britain and missed out on potential underwriting profits and investment income the US premiums earned.
Some American brokers hope to limit this arrangement once the New York Insurance Exchange opens its doors Monday, March 31.
"The exchange is the right idea at the right moment," comments Beverly Wadsworth, vice-president for Continental Corporation, the parent company of the Continental Insurance Companies, a member of the exchange.
So far some 40 brokerage firms have paid $10,000 each to become members of the exchange, and 15 charter syndicates have been formed to underwrite insurance policies. The 15 syndicates have a capital base of $50 million.
Officials of the exchange are optimistic this membership will grow. Don Reutershan, president of the exchange, predicts that by year-end there will be 30 underwriting syndicates operating and in 10 years investment in the exchange could reach $1 billion with a potential $2 billion to $13 billion in premiums coming through the exchange. About a year from now, about 1,000 new jobs will be created in the city. The exchange is estimating that by the year 2000 some 10,000 people will have jobs associated with the exchange.
In part because of the prospects for these new jobs, the exchange was successful at convincing the New York State Legislature to pass a series of bills that established an "insurance free-trade zone."
Under the umbrella of the zone, licensed insurers are able to write large corporate risks with annual premiums of more than $100,000 as well as difficult-to-place and unusual risks without being hampered by state regulations concerning rates, policy forms, or state taxes. State-licensed insurers will not be allowed to underwrite personal lines, such as automobile of life insurance in the zone.
Initially, Mr. Reutershan expects reinsurance will be the major activity of the exchange. This is the process by which insurance companies spread the risk of catastrophic losses by buying insurance on their policies from other companies. In fact, Mrs. Wadsworth expects that members of the New York exchange will go to Lloyd's for some reinsurance activities and members of Lloyd's will come to the US for the same reason.
Eventually, the exchange will be writing policies on all lines of insurance, including maritime insurance, which was where Lloyd's got its start.
"It all depends on people," says Mr. Reutershan. "If the insurance companies are lucky enough to hire good people, they'll get into different lines. If they hire people who have some expertise in the marine business, I'm sure they will get into marine insurance."
For Lloyd's of London, the venerated exchange founded in 1688 in a coffeehouse, the competition from New York couldn't come at a worse time. Lloyd's has seen more than its share of losses this year in the maritime business as some $275 million in claims were made last year. And, still pending is a $90 million claim on the Atlantic Empress, a tanker that was lost off Tobago after colliding with another ship, also a Lloyd's risk.
Additional claims will come in this year from RCA for $45 million for its lost satellite and possibly up to $150 million from NBC for the canceled Olympic coverage. And, Lloyd's members still have to pay the claims made on them by computer companies who insured themselves against new model introduction by IBM.
STill, Lloyd's is used to paying off large claims. The insurance exchange made good on its $5 million policy on the Titanic and the $100 million in property losses as a result of the San Francisco earthquake.
Lloyd's also has a unique strength in that it has always remained a free-wheeling, highly entrepreneurial operation. With some 18,500 members and 403 syndicates collecting a total of some $4.5 billion in premiums last year, the exchange members have never hesitated to write unusual policies. Lloyd's, which is often mistaken for one insurance company, which it is not, has written policies on Marlene Dietrich's legs and the late Jimmy Durante's nose.
It is unlikely that the New York exchange will begin with this type of spirit. Instead, as Mrs. Wadsworth comments, "The exchange members will probably stick to traditional lines" such as reinsurance" and large corporate types of risks. However, resinsurance is a large market, she notes, representing $9 billion in coverage for Lloyd's last year.
The exchange will also open up during a time of sagging profits for the large US insurance companies. John Burrdige, a vice-president at A.M. Best & Co., a publisher of insurance company solvency reports, says he expects insurance companies to see their profits shrink from 1979 levels. Next year, he predicts, will also be a bad year.