Delaware Senate Bill 46 (Prior Session Legislation)

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Completed Legislative Action
Spectrum: Slight Partisan Bill (Democrat 5-3)
Status: Passed on May 19 2011 - 100% progression
Action: 2011-05-19 - Signed by Governor
Text: Latest bill text (Engrossed) [HTML]

Recent turmoil in the financial markets has heightened scrutiny, in the capital markets and among financial institutions, about identifying, managing and limiting risk, the need for adequate capitalization and for understanding the interdependency of the different financial sectors. One source of risk to financial market participants has arisen due to the lack of certainty in the treatment of qualified financial contracts and netting agreements in the event of the insolvency of state regulated insurers. The importance of maintaining certainty among the participants in these markets has been acknowledged and addressed through changes in the Federal Bankruptcy Code, the Federal Deposit Insurance Act (governing the insolvency of banks), the Dodd-Frank Wall Street Reform and Consumer Protection Act, and other federal legislation and regulatory orders, as well as in the laws of major non-U.S. jurisdictions applicable to the insurers’ trading counterparties. This bill corrects this lack of certainty under the Delaware insurance laws by specifying the status of “qualified financial contracts” and the permissibility of netting under such contracts in a formal delinquency proceeding. This bill brings Delaware’s insurance law into conformance with similar provisions of the Federal Bankruptcy Code, the Federal Deposit Insurance Act and the National Association of Insurance Commissioners Insurance Receivership Model Act (“IRMA”). This bill also eliminates a threat to the financial stability of Delaware insurers and addresses a competitive disadvantage of Delaware insurers vis-a-vis their competitors in other jurisdictions where netting legislation has been adopted. Qualified financial contracts and netting agreements have proven to be of great assistance to Delaware insurers during the recent market downturn in managing their risks. Given the recent experience of financial market participants, however, the lack of certainty of the treatment of these agreements and contracts in a formal delinquency proceeding now threatens the ability of Delaware insurers to continue to use qualified financial contracts and netting agreements to manage their risks and remain financially strong. Recent changes in the international capital rules for banks under the Basel II accords, events in the financial markets over the past few years and the increasingly sophisticated risk control methods of financial institutions have placed a spotlight on the lack of protections for these contracts under the insurance laws of Delaware and many other states. Without the certainty that adoption of this bill will provide, it will become difficult for the counterparties of Delaware insurers to obtain the necessary legal comfort to transact business with Delaware insurers. The consequence for Delaware insurers will be increased costs in the pricing for their transactions (due to the perceived increased risk), and potentially, lack of access to these financial instruments. An inability to continue to trade or the increase in the prices at which insurers can transact potentially threatens the competitiveness and financial strength of Delaware insurers. For these reasons, as of March 4, 2011, eleven states have already taken action to adopt legislation validating these netting arrangements for insurers and several more states are currently considering adoption of similar legislation. By providing for the enforcement of netting and closeout rights as provided in this bill for “qualified financial contracts,” Delaware will bring its insurer insolvency law into harmony with federal law and IRMA, will give both insurers and their creditors the certainty and safety they need, and will eliminate a competitive disadvantage of Delaware insurers. Section 1 of this bill confirms the power of the Delaware Insurance Commissioner to issue rules, regulations an orders relating to investments by insurers, including setting standards for the prudent use of derivative instruments and other “qualified financial contracts.” Section 2 of this bill adds new subsections (14)-(24) to 5901 of the Insurance Code, providing, for purposes of Chapter 59, definitions of specific types of financial contracts commonly used in the financial markets, including swap agreements, repurchase agreements, forward contracts, commodity contracts and securities contracts as “qualified financial contracts” and the related “netting agreements” in addition to related terms including affiliate, creditor, claimant, formal delinquency proceeding and transfer. These definitions are intended to be consistent with those used under IRMA and the Federal Deposit Insurance Act, applicable to bank insolvencies. Section 3 of this bill adds a new 5933 to the Insurance Code. Subsection (a) of 5933 provides for the enforcement and recognition of the contractual rights of the insurer’s counterparties under qualified financial contracts, netting agreements and related security arrangements to terminate, liquidate, accelerate and close out such contracts, to set off and net out obligations owing under such contracts, and to enforce any security rights under such agreements, free of any stay, injunction or prohibition which might otherwise apply under Chapter 59. Subsection (b) of 5933 provides for the transfer by the non-defaulting party to the receiver of any net or settlement amount owing to the insurer under a qualified financial contract. Subsection (c) of 5933 provides for the transfer of all financial contracts between an insurer and a single counterparty and its affiliates together if a bulk transfer of insurer liabilities or contracts is made by the receiver. Subsection (d) of 5933 provides for notification upon transfer of a netting agreement or qualified financial contract by the receiver. Subsection (e) of 5933 provides for validation of payments and transfers of money and property under netting agreements and qualified financial contracts made prior to the commencement of a rehabilitation, insolvency or conservation proceeding, unless such transfers were made with actual intent to hinder, delay or defraud the insurer, the receiver or other creditors. Subsection (f) of 5933 provides that if the receiver disaffirms or repudiates any qualified financial contracts or netting agreements with a counterparty, it must disaffirm or repudiate all such contracts. Subsection (g) of 5933 provides a definition of the term “contractual right’ as such term is used in this new 5933. Subsection (h) of 5933 provides that this new 5933 will not apply to affiliates of an insurer subject to proceedings under Chapter 59, unless the Commissioner has previously approved the application of 5933 to a particular affiliate. This new 5933 would apply to contracts of both general and separate accounts of insurers. Section 4 provides that upon enactment this bill would be effective immediately, except that it would only apply to a liquidation, receivership or conservatorship proceeding that commences under Chapter 59 of the Delaware Insurance Code on or after the enactment of this bill.

An Act To Amend Title 18 Of The Delaware Code Relating To Qualified Financial Contracts, Derivative Instruments And Rehabilitation And Liquidation.

Sen. Patricia Blevins [D]	Sen. Colin Bonini [R]	Sen. Brian Bushweller [D]	Rep. William Carson [D]
Sen. Gerald Hocker [R]	Rep. Deborah Hudson [R]	Rep. Bryon Short [D]	Sen. David Sokola [D]

2011-05-10 - House - House Third Reading (Y: 39 N: 0 NV: 0 Abs: 2) [PASS]
2011-04-13 - Senate - Senate Third Reading (Y: 19 N: 0 NV: 1 Abs: 1) [PASS]

Date	Chamber	Action
2011-05-19		Signed by Governor
2011-05-10		Passed by House of Representatives. Votes: Passed 39 YES 0 NO 0 NOT VOTING 2 ABSENT 0 VACANT
2011-05-04		Reported Out of Committee (ECONOMIC DEVELOPMENT/BANKING/INSURANCE/COMMERCE) in House with 3 Favorable, 4 On Its Merits
2011-04-14		Introduced and Assigned to Economic Development/Banking/Insurance/Commerce Committee in House
2011-04-13		Passed by Senate. Votes: Passed 19 YES 0 NO 1 NOT VOTING 1 ABSENT 0 VACANT
2011-04-13		Amendment SA 1 - Passed by Senate. Votes: Passed 19 YES 0 NO 0 NOT VOTING 2 ABSENT 0 VACANT
2011-04-13		Amendment SA 1 - Introduced in Senate
2011-04-06		Reported Out of Committee (INSURANCE) in Senate with 1 Favorable, 5 On Its Merits
2011-03-31		Assigned to Insurance Committee in Senate

Type	Source
Summary	http://legis.delaware.gov/LIS/lis146.nsf/2bede841c6272c888025698400433a04/cc5df801460f2e938525785d0059415b?OpenDocument
Text	http://legis.delaware.gov/LIS/lis146.nsf/vwLegislation/SB+46/$file/legis.html?open
Text	http://legis.delaware.gov/LIS/lis146.nsf/EngrossmentsforLookup/SB+46/$file/Engross.html?open
Roll Call	http://legis.delaware.gov/LIS/lis146.nsf/7712cf7cc0e9227a852568470077336f/9e3f0dab33594e698525787100766f11?OpenDocument
Roll Call	http://legis.delaware.gov/LIS/lis146.nsf/7712cf7cc0e9227a852568470077336f/92431a1b6081f5be8525788c007319fb?OpenDocument