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CHICAGO-The Chicago Board of Trade may challenge the Illinois Insurance Exchange for licensing rights to start a new insurance exchange.

The CBOT's executive committee last week recommended hiring Ernst & Young L.L.P. to assess competitors, estimate start-up costs and assemble a business plan for the project, which the CBOT tentatively dubbed Chicago Board Insurance Exchange.

Board of Trade Chairman Patrick Arbor said the CBOT would tap its underlying physical security to augment and build the futures contracts.

The effort follows the CBOT's decision not to participate in the Bermuda Commodities Exchange that opens this week, led by New York-based American International Group Inc. (BI, March 17).

In its potential bid to create a state-chartered exchange, the Board of Trade could edge out the IIE, which in the past year has lost several syndicates to insolvency (BI, Sept. 15).

Meanwhile, IIE Chairman and Chief Executive Officer James E. Tait has been meeting with insurers such as CNA Financial Corp. and Allstate Corp. and investment banks to drum up support for a second insurance exchange. That IIE-led effort could compete directly with the CBOT and perhaps other groups for a new exchange license that's slated to become available in January.

If the CBOT wins the new exchange license, the Board of Trade's individual members, customers and member firms could in effect form their own mini insurance companies-assembling capital pools to underwrite risks. They would offset those risks through insurance futures contracts offered at the Board of Trade.

The catalyst in the CBOT initiative is a new Illinois law aimed at stabilizing the ailing IIE. The statute, which increases the Illinois Department of Insurance's oversight of the IIE, also enables Illinois Insurance Director Mark Boozell to authorize one new state-chartered insurance exchange.

The IIE's Mr. Tait is optimistic about attracting interest in a new market that would focus on risk securitization and insure risks currently placed offshore.

Since late last year, three of the IIE's underwriting syndicates -Geneva Assurance Syndicate Inc., First Oak Brook Corp. Syndicate Inc. and Resure Inc.-have been declared insolvent. Several others have stopped writing new business, and Comprehensive Ensurers Market Syndicate Inc. is in the process of pulling out, the Illinois Department said.

The IIE and the CBOT aren't likely to be the only groups vying for the exchange license.

"We've had confidential discussions with at least five groups interested in forming an exchange," said Mr. Boozell. "They are all in the talking stages about how to go about it and what the regulatory framework is."

A CBOT decision on whether to seek the license is still at least a month off, said Richard Sandor, second vice-chairman and architect of the Board of Trade's catastrophe futures market.