Luncheon Address to the Insurance Federation
of New York
by Kathryn Wylde, President & CEO
PARTNERSHIP FOR NEW YORK CITY

New York, New York
November 8, 2006

PDF 130K

Insuring the Future of New York

Thank you for the opportunity to speak to the leadership of one of our city’s most important industry sectors. I am going to take this opportunity to comment on two subjects: the role that the insurance industry plays in the New York City economy; and, looking forward, how members of the Insurance Federation can help to “insure” New York’s continued leadership in the global economy and benefit from doing so.

With eight consecutive quarters of growth behind us, the City has fully recovered from the devastating effects of 9/11, thanks in no small part to almost $30B that has been paid out by the insurance industry. In 2005, New York’s economy reached a record high $467.7 billion gross city product. If Metropolitan New York were a country, we would be the tenth largest economy in the world—ahead of India and just behind Canada.

Financial services, including insurance, is by far our most important industry, responsible for fully a quarter of the economic output of the city and more than half the growth in the local economy over the past 15 years. Today there are about 459,000 financial services jobs in the City. Insurance carriers and related services account for 57,600 of these jobs, representing 1.5% percent of the private sector work force but over 3% of City gross income—totaling $6.4 billion in wages in 2005. Your industry also contributes 2% percent of the city’s personal income tax revenues.

Within the insurance sector, employment has grown 1.2% in the past year. The average wage of insurance and related services has grown 17% since 2001, or about 4% per year.

The insurance industry also plays a role in the vitality of many other industries that are contributing to the city’s economic well being, including real estate, construction and travel and tourism, and health care.

• With the support of your industry, the real estate and construction markets that were seriously at risk after 9/11 are now booming. The average commercial asking rent for Class A office space is $70.30 per square foot in Midtown and $44.64 in Lower Manhattan.

• Housing production is the highest in 30 years. Over 20,000 new residential units were completed in 2005, a 6.5% increase from 2004. The city’s population has grown to more than 8 million.

• Tourism, which plummeted after 9/11, will reach a record 44.4 million visitors in 2006. Last year, another record was set with almost 100 million passengers flowing through the NY Metro area airports. Tourism generates more than $22 billion in spending, $5.4 billion in taxes and $14.2 billion in wages.

• The health care sector remains one of the city’s largest employers and that sector is diversifying in important ways. This month, we hope to break ground on the East River Science Park, the city’s first commercial biotech complex that will be built on the Bellevue Hospital campus. This marks the beginning of NYC asserting its preeminence not only in medical care, medical education and research, but in commercialization of our discoveries.

Thanks to a thriving economy and excellent stewardship by the Bloomberg Administration, city government is also in good fiscal shape. For the fiscal year ending June 30, 2006, the city enjoyed a record $3.8 billion net surplus in revenues from a $50B budget and it is estimated that we will see a surplus again this year.

But there are challenges ahead for New York—challenges that require innovative solutions that the insurance industry is well positioned to provide. I think there is a growing alignment between the economic and policy issues that are important to New York City and your industry interests. An obvious case is the extension of the Terrorism Risk Insurance Act. TRIA has made the recovery of the Manhattan real estate industry possible and is a priority in Mayor Bloomberg’s Washington agenda.

There are many other areas where your industry has the expertise and infrastructure necessary to make a major contribution to the city and, at the same time, benefit from the support of its business and political leadership.

Here are a few examples:

First, the industry is already the most important partner with law enforcement in risk assessment associated with improved security and anti-terrorism initiatives. Fifty percent of the nation’s insured loss exposure due to terrorism is concentrated in New York City. The industry has worked to reduce the premium costs that skyrocketed in New York after 9/11. One innovative effort that the Partnership is working on with Marsh is to help arts and cultural organizations find ways to mitigate rising insurance costs. We are looking at organizing a captive for these groups, which would involve long overdue reform of State law. We also propose creating a captive insurance company haven in Lower Manhattan, where these entities could operate on terms similar to those that have attracted captive business to Vermont and other states.

Health care cost and coverage is another major area where your industry expertise is needed to help government craft solutions. Although the City and State achieved balanced budgets in 2006–2007, government expenditures are growing much faster than the economy and tax base. Expenses associated with health care are among the biggest budget busters and have been identified by Governor-elect Eliot Spitzer as a top priority for reform. Medicaid now consumes nearly half of the state budget, at a total cost of $45B a year (FY05). New York State’s Medicaid expenditures are higher than any other state, with average per capita cost of $2,615—more than California and Texas combined. An equally daunting problem is the growing population of working people who have no health insurance—1.3 million in NYC and 2.7 million statewide.

Governor-elect Spitzer has vowed to reduce Medicaid costs. He also intends to provide universal coverage for children, which is estimated to cost more than $33B over 4 years, without raising taxes. Accomplishing these goals will require expertise that insurers can provide, starting with an understanding of what NYS has done to drive health insurance providers out of the state and drive health care costs up. Helping the state craft better policies to deal with malpractice liability, incentives for long term care insurance, redrawing reimbursement rates and providing relief from excessive mandates for coverage are reforms that will all have to be on the table if the Spitzer administration is going to get a handle on health care and health insurance costs.

Another area of growing interest to local government is climate change and its implications for the city’s future. Here the industry has already stepped up, with companies like Swiss Re and AIG in the lead, providing early information about the problem and raising international and local consciousness. In October, Mayor Bloomberg announced the formation of a new office of Long Term Planning and Sustainability that intends to turn New York City into a green and clean city. Cities, after all, are responsible for about 75% of the world’s fossil fuel consumption and are, therefore, big contributors to global warming. Moreover, since most are on water, cities are most vulnerable to impacts of climate change.

The Mayor’s new office is completing a measurement of municipal government’s carbon footprint this month and will then proceed with measuring and setting up emission targets for the city as a whole. The Partnership is focusing on how traffic congestion contributes to this problem. We are about to release a study that will document a $12-$15 B annual cost of excess congestion to the NY economy.

The city is also seeking to generate new development of affordable housing across the five boroughs. The insurance industry was instrumental in bringing an end to the pervasive patterns of arson that plagued the city in the 60’s and 70’s and you were important partners in the neighborhood rebuilding efforts of the 80’s and 90’s. To meet housing needs, the city is looking to reclaim approximately 4,000 vacant or underutilized sites zoned for manufacturing, many of them contaminated brownfields. Another emerging priority is the privatization of financing, development and management of public infrastructure —particularly roads and bridges—as a way to limit public indebtedness and control costs. All these activities will require sophisticated finance and insurance approaches that your industry can help provide.

A related issue facing the city are rising construction costs in the city—which increased 9% in 2005 and have continued to rise at a rate of approximately 1% a month in 2006. City Hall has appointed a task force to consider this issue, but insurers can undoubtedly help identify public policies that contribute to these extraordinary costs—such as the scaffolding law that makes developers responsible for all construction-related accidents, regardless of culpability by workers.

In the area of economic development, the Bloomberg Administration has already sought to tap private sector relationships with foreign companies as part of its business attraction strategy. More than 2,600 major international companies from 95 countries have offices in New York City and employ 275,000 people. New York’s insurers have some of the oldest and strongest relationships with leaders in the emerging economies of China, India, Mexico and other countries that city and state government are eager to entice to open U.S. headquarters operations here.

Finally, I want you to know that there is tremendous support for your Federation’s mission to keep New York as the insurance capital of world, both in terms of headquarters operations in the city and spinning off some economic activity to depressed areas of the state. To the extent that you come forward with agenda that reinforces these objectives, our organization would be pleased to work with you on its implementation.

I hope these ideas stimulate some discussion within the industry about forming new partnerships with the city and state. The Partnership for New York City was created to develop and manage such partnerships and we are available to work with you on a variety of fronts. In closing I will mention one interesting opportunity to work together on restoring a regulatory environment that allows American business to compete in the global economy and encourages foreign investment here.

Last week, the Wall Street Journal carried an op ed written by Senator Chuck Schumer and Mayor Mike Bloomberg. Their theme was that New York’s future as the world capital of finance is threatened by federal and state laws and regulations that place a terrible burden on domestic companies and discourage foreign investment.

Bill McDonough, former President of the Federal Reserve Bank of NY, once told me that NYC became the world financial capital because, for decades, our government and industry regulators encouraged innovation and risk-taking, in contrast to the heavy-handed regulatory approach toward financial services in the rest of the world. Today, as Schumer and the Mayor point out, that risk-taking environment has changed. If anyone is going to provide political leadership for restoring balance to the regulatory and litigation environment, it is likely to be the leaders from New York, which Schumer and Bloomberg have now signaled they are prepared to do.

There is even the possibility that, just as President Nixon went to Red China, so Governor-elect Spitzer might go to Washington as an unexpected advocate for restoring a regulatory environment that will permit New York City to remain the world capital of financial services and a magnet for international investment. This could be a unique opportunity to tackle some issues that have previously seemed intractable. As we contemplate the results of yesterday’s elections, and the national ambitions of a passel of powerful New Yorkers, it doesn’t hurt to dream!

The Partnership for New York City (www.pfnyc.org) is a network of business leaders dedicated to enhancing the economy of the five boroughs of New York City and maintaining the city’s position as the global center of commerce, culture and innovation.