Relates to credit default insurance companies; repealer

10 Co-sponsors

• Jonathan Bing
• Micah Kellner
• Steven Cymbrowitz
• Crystal Peoples-Stokes
• Mark J.F. Schroeder
• Mike Spano
• RoAnn Destito
• William A. Barclay
• Matthew Titone
• Janele Hyer-Spencer

28 Multi-sponsors

• Inez Barron
• Michael Benjamin
• William Boyland
• Kevin Cahill
• Nancy Calhoun
• Nelson Castro
• Francine DelMonte
• Michael DenDekker
• Steven Englebright
• Ginny Fields
• Sandy Galef
• Aileen Gunther
• Ellen C. Jaffee
• Susan John
• David Koon
• Rory Lancman
• Barbara Lifton
• William Magee
• Nettie Mayersohn
• John McEneny
• Joan Millman
• Audrey Pheffer
• Andrew Raia
• Robert Reilly
• Annette Robinson
• Robin Schimminger
• Frank Skartados
• Albert A. Stirpe

BILL NUMBER:A10783

Title of bill

An act to amend the insurance law, in relation to credit default insurance corporations, and to repeal certain provisions of the insurance law relating thereto

Purpose

This bill would regulate the sale and purchase of credit default swaps as financial guaranty products under the New York State insurance law.

Summary of provisions

Section 1 of the bill:

* Defines credit default insurance, in line with other credit default instruments such as financial guaranty, surety, residual value, and credit insurance.

* Mandates licensing of credit default insurers and imposes solvency standards, such as minimum capital and surplus requirements.

* Establishes contingency, loss, and unearned premium reserve require- ments.

* Sets strict limitations on permissible credit default insurance, restricting writing of the product to purchasers with a material inter- est in the underlying asset. It imposes single and aggregate risk limits.

* Authorizes the insurance regulator to prescribe minimum policy and rate standards and provides for certain restrictions on acceleration payments.

* Provides credit for reinsurance placed with credit default insurers or with property-casualty insurers or reinsurers meeting certain restrictions.

* Provides that an insurer issuing credit default insurance shall be subject to all the provisions of this chapter are applicable to property/casualty insurers to the extent that such provisions are not inconsistent with the provisions of the insurance law.

* Establishes the relationship to the security fund.

* Contains civil and criminal penalties for selling impermissible credit default insurance.

* Provides transition provisions that would permit financial guaranty insurers to continue to issue credit default insurance.

Section 2 contains the effective Date.

Justification

CDS are obscure financial products that provide finan- cial guaranty or insurance, in the event of a negative credit event,

like bankruptcy. At present they comprise a $26 trillion dollar market. These unregulated insurance products played a pivotal role in the recent financial crisis by allowing banks and other institutions to operate like insurance companies but without the regulations that control insur- ance companies.

This bill would use state insurance law to address this loophole created by the federal government. Companies selling CDS should not operate outside of regulation.

In fact, AIG's non-insurance unit, AIG Financial Products Corp., which was outside the regulatory scope of state insurance departments, sold hundreds of billions of dollars of CDS protection - protection which they sold but could not honor until the federal government bailed out AIG with nearly $200 billion.

This legislation protects New York State's financial services sector, and the broader economy, from the harmful effects of the complex, risky and unregulated CDS market. By firmly placing the selling and buying of CDS under the insurance law, this legislation ensures that sellers of CDS be licensed by New York State as insurance companies and that they have adequate capital and reserves to pay claims.

Furthermore, this legislation bans speculation in the market by requir- ing that those who buy this insurance have an interest in the entity they are buying protection on. The current practice is you're your next door neighbor buying homeowners on your house. We don't allow that because it gives your neighbor a temptation to burn down your house. Likewise, this will remove the moral hazard inherent in purchasing insurance on an asset that is not owned.

This bill is National Conference of Insurance Legislators (NCOIL) model bill. This model bill is being introduced around the country in an attempt to reign in some of the most dangerous practices that lead to the financial crisis.

Prior legislative history

New legislation.

Fiscal implications

None.

Effective date

This act shall take effect immediately.