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. (a) Any domestic incorporated insurer having aggregate
capital and surplus as of the preceding December 31 of at least
twenty-five million dollars ($25,000,000), after investing an amount
equal to its required minimum paid-in capital in securities specified
in Article 3 (commencing with Section 1170), may purchase insurance
futures contracts, purchase call options on insurance futures
contracts, and sell put options on insurance futures contracts in
bona fide hedging transactions, subject to the limitations set forth
in this section.
Domestic insurers may sell insurance futures contracts, sell call
options on insurance futures contracts, and purchase put options on
insurance futures contracts only for the purpose of a closing
transaction. No other sales of insurance futures contracts, sales of
call options on insurance futures contracts, or purchases of put
options on insurance futures contracts are authorized under this
section.
(b) For purposes of this section, "insurance futures contracts"
mean contracts based on indices of loss performance of insurance
contracts and traded in accordance with the rules and procedures of a
board of trade regulated by the Commodity Futures Trading
Commission, or any successor agency, and subject to the terms and
conditions of the Commodity Exchange Act (7 U.S.C. Sec. 1 et seq.),
as amended. For purposes of this section, "put and call options on
insurance futures contracts" mean put or call options, regulated in
accordance with the rules of the board of trade on which the options
are traded, on insurance futures contracts.
(c) No domestic insurer may purchase insurance futures contracts,
purchase call options on insurance futures contracts, or sell put
options on insurance futures contracts unless the insurance futures
contracts are required to be settled in cash within nine months after
the end of the loss period underlying the insurance futures
contracts, and the relevant type of insurance futures contracts have
attained an average daily trading volume of at least 250 contracts
and an open interest of 1,000 contracts as reported by the relevant
board of trade for the one-month period prior to the insurer
initiating the transaction.
(d) A transaction will be considered a bona fide hedging
transaction only if, upon execution, (1) the insurance futures
contract or option is specifically identified with a group of
insurance policies issued or reasonably expected to be issued by the
insurer in the ordinary course of business and (2) the insurer's
relevant underwriting or insurance-related risk exposures bear a
correlation to the risk exposures of the index underlying the
insurance futures contracts or options thereon entered into as part
of the hedging transaction. For purposes of this section,
"correlation" means that the loss experience of the policies hedged
is, at the date of purchase of the insurance futures contracts,
expected to develop similarly to the loss experience of the policies
underlying the insurance futures contract when exposed to similar
occurrences and conditions. The insurer shall identify this hedging
transaction and the policies and written premiums hedged on its books
and records and any insurance futures contract or option position
shall be terminated as soon as possible after this correlation does
not exist.
(e) Notwithstanding other limitations of this section, an insurer
may hold open insurance futures contracts and put and call options on
insurance futures contracts which do not exceed the equivalent of 75
percent of the insurer's written premium for each line of business,
as designated in the annual statement required by Section 923, being
hedged pursuant to this section. For purposes of this subdivision,
equivalence shall be based on the par dollar value of the insurance
futures contracts and an insurer's written premium shall be measured
based on the loss period reflected in the underlying futures
contracts.
(f) A domestic insurer shall not enter into hedging transactions
in insurance futures contracts or options on insurance futures
contracts unless the transaction is authorized or approved by the
insurer's board of directors or a committee designated by the board.
This authorization or approval shall be entered on the records or
minutes of the domestic insurer and, if made upon the authority of a
committee of directors, shall be submitted to the full board of
directors for ratification at their next meeting. The entry of
approval shall show the fact of entering into the hedging
transaction, the specific policies hedged, the size of the hedge as
measured pursuant to subdivision (e), and the name of each director
voting to approve the hedging transaction.
(g) The commissioner may, in his or her discretion, by written
order require the disposal of any insurance futures contracts or
options on insurance futures contracts made in violation of this
section. Pending a disposal pursuant to an order by the commissioner,
the insurance futures contracts or options on insurance futures
contracts shall not be given any effect on any statement required by
this code purporting to show the financial condition of the domestic
insurer or in measuring the financial condition of the domestic
insurer for the purpose of determining whether the domestic insurer
is solvent or insolvent. The commissioner may also, for good cause
shown, order the disposal of any insurance futures contract or option
on insurance futures contracts.
(h) Insurance futures contracts and put and call options on
insurance futures contracts shall not be deemed to be investments for
purposes of any investment limitations or authorizations contained
in this code.
(i) The commissioner may adopt rules and guidelines establishing
standards and requirements relative to practices authorized in this
section. The commissioner shall issue a bulletin by June 30, 1994,
setting forth the accounting, reporting, and valuation practices and
procedures for insurance futures contracts. However, a bulletin shall
not be required if, prior to June 30, 1994, accounting practices and
procedures are officially promulgated by the National Association of
Insurance Commissioners. The bulletin issued pursuant to this
subdivision shall not be superseded by any action of the National
Association of Insurance Commissioners that conflicts with or that
fails to address matters addressed by the bulletin. No insurer shall
engage in hedging transactions with respect to insurance futures
contracts or put and call options on insurance futures contracts
until the earlier of the date a bulletin is issued or the date
accounting practices and procedures are officially promulgated by the
National Association of Insurance Commissioners and except pursuant
to this section.