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CHICAGO-The Illinois Insurance Exchange hopes its major problems are behind it and new opportunities are ahead.

"The general perception is that the exchange is dead-and it's not," said James E. Tait, president and chief executive officer.

He hopes a new state law will help revive the IIE's stability and credibility as a market for surplus lines insurance and the handful of syndicates writing there.

The law gives the state Insurance Department greater oversight of the exchange's solvency, imposes greater financial reporting and organizational requirements on syndicates and increases public representation on the IIE's board (BI, June 9). The law also authorizes creation of an additional exchange.

Mr. Tait said he is discussing with potential investors the feasibility of a second exchange as "an alternative domicile" for different types of risk transfer, such as non-traditional securitization products. He declined to discuss details.

Regardless of the IIE's future possibilities, it must deal with remaining problems from its past.

In an eight-month period spanning late 1996 and early 1997, three syndicates became insolvent (BI, March 10). They were Geneva Assurance Syndicate Inc., First Oak Brook Corp. Syndicate Inc. and Resure Inc. Syndicate.

The insolvencies create the first test of the IIE's prefunded $35 million guaranty fund, which is the only guaranty fund for surplus lines insurance buyers apart from a state program in New Jersey.

IIE executives and state officials are trying to clarify the guaranty fund's response to unpaid claims, which policyholders generally were given a year to file.

Another problem was a general decline in financial results in 1996.

The IIE's syndicates wrote $85.4 million in gross premiums in 1996, down 6.5% from a restated $91.4 million in 1995. The premiums were restated to reflect the prior writings of active syndicates. Last year's results were 71% below the record $294.7 million the IIE reported in 1994.

The drop in non-admitted premium figures caused the IIE to lose its place among the rankings of the largest U.S.-based surplus lines insurers.

Also down were gross premiums written on a direct, non-admitted basis for commercial risks. They dropped 44%, to $78.1 million last year. However, the general decline in premium volume resulted in commercial business accounting for a greater percentage of the IIE total book of business, 93% last year, up from 81%.

In addition, the IIE reported in 1996 that its net income dropped 35% to $6.4 million and its combined ratio deteriorated to 107.8% from 104.7%.

Contributing to the IIE's poorer results was the fact that several syndicates have ceased writing new business during the past several months. For example, First Mercury Syndicate Inc. and Transco Syndicate #1 withdrew from the IIE, Comprehensive Ensurers Market Syndicate Inc. is suing the IIE over withdrawal arrangements, and Britamco Underwriters Inc. recently filed an application to withdraw.

In addition to CEM, syndicates considered active on the exchange include AAI Syndicate #1 Ltd., Agora Syndicate Inc., Prime Syndicate Inc. and RCA Syndicate #1 Ltd.

The trend of negative results continued into the first half of 1997 as gross written premiums fell to $17.9 million, according to the IIE's June 30 results. But, the first-year net income figure of nearly $7.6 million has already exceeded the $6.4 million reported for all of 1996.

Meanwhile, capital and surplus during the first half dropped less than 1% to $71.8 million.

"I think that the financial difficulties that have been problematic for us have bottomed out. We are beyond that now," the IIE's Mr. Tait said.

There is still a market for the IIE's traditional specialties, he said. The IIE historically has been a niche market for coverages such as errors and omissions and liquor liability that are written on a surplus lines basis.

Syndicates collectively write a wide range of liability coverages as well as some property coverages for dozens of types of businesses, including contractors, bars and taverns, restaurants, special events organizers, outfitters and guides, used car dealers, real estate agents and day care centers.

Depending on the risk, the IIE traditionally can provide limits of about $5 million for property and up to $2.5 million for liability.

"I continue to see an opportunity for niche players, but in a weak market there is less of an opportunity," Mr. Tait said.

Although the new law allows for the IIE's dissolution, "I don't anticipate there being any action to dissolve the exchange," he said.

The IIE as an entity is accepted as an eligible surplus lines writer in about three dozen states. IIE syndicates are accepted on an individual basis in seven other states. Generally, the IIE cannot write business in California, Connecticut, Maine, Nevada, New Hampshire, New York, Rhode Island and Texas.

Mr. Tait hopes the new law increasing the state Insurance Department's oversight over the exchange may improve the IIE's standing in the eyes of out-of-state regulators as well as buyers.

Provisions give the Illinois Insurance Department responsibility for examining the financial records of the exchange, which it previously reviewed annually. In addition, the law imposes new financial reporting requirements on syndicates, which will have to file quarterly statements, actuarial opinions and audited financial reports with the department.

The legislation also creates an executive committee that will consist of three of five public trustees on the IIE's 13-member board. That committee will oversee IIE operations, though it will be subject to a nine-member majority of the board.