Financial Reform Derivatives
Special Section: Dodd Frank Financial Reform Legislation & State Insurance Regulation


Dodd-Frank Financial Services Regulatory Reform:
NAIC Initiatives Regulatory Regime for Over-the-Counter Derivatives Market

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act establishes a regulatory regime for the over-the-counter derivatives market:

While state insurance regulators recognize the importance of this new regulatory regime, particularly the transparency that it will bring to derivatives markets, it is important that this new layer of regulation not conflict with the states’ current authority over insurance products and insurers.

State investment laws govern the type and extent of financial products in which insurance companies may invest. Such laws exist so that insurers do not expose themselves to significant risk in the financial markets. As part of their solvency regulation activities, state insurance regulators closely monitor insurer investments, including the use of derivatives, to ensure that companies are not exposed to financial risks that could undermine their ability to pay insurance claims on an ongoing basis.

Financial institutions use derivatives differently to achieve different institutional goals.  Insurers predominately use them to hedge against commercial risks, particularly the type of risks for which they write insurance policies.  The NAIC is working with the SEC and the CFTC on rules implementing Title VII, which should be crafted to recognize the uses for and the extent to which insurers use derivatives, thereby ensuring that insurers do not face an unfair disadvantage in the capital markets as compared to other institutions.