Section 3.21.213. Derivative instruments.

	(a)  Before engaging in a derivative transaction, an insurer shall establish, and submit to the director for approval, written guidelines that will be used for effecting and maintaining derivative transactions. The guidelines must  
		(1) specify insurer objectives for engaging in derivative transactions and strategies and all applicable risk constraints, including credit risk limits;  
		(2) establish counterparty exposure limits and credit quality standards;  
		(3) identify permissible derivative transactions and the relationship of those transactions to insurer operations, including a precise identification of the risks being hedged by a derivative transaction; and  
		(4) require compliance with internal control procedures.  
	(b)  An insurer shall have a written methodology and systems for determining whether a derivative instrument used for hedging has been effective.  
	(c)  An insurer shall have written policies and procedures describing the credit risk management process and a credit risk management system for over-the-counter derivative transactions that measures credit risk exposure using the counterparty exposure amount.  
	(d)  An insurer's board of directors shall, in accordance with 3 AAC 21.211,  
		(1) approve the written guidelines, methodology, policies, and procedures required under (a) - (c) of this section and the systems required under (b) and (c) of this section;  
		(2) determine whether the insurer has adequate professional personnel, technical expertise, and systems to implement investment practices involving derivatives;  
		(3) review whether derivative transactions have been made in accordance with the approved guidelines and consistent with stated objectives; and  
		(4) take action to correct any deficiencies in internal controls relative to derivative transactions.  
	(e)  Before engaging in derivative transactions, an insurer shall submit to the director for approval written documentation explaining the insurer's internal guidelines and controls governing derivative transactions. If the insurer cannot demonstrate that the internal guidelines and controls would be adequate to manage the risks associated with the derivative transactions the insurer intends to engage in, the director will disapprove the proposed internal guidelines and controls. The insurer may not engage in derivative transactions without the director's approval of the insurer's internal guidelines and controls governing derivative transactions.  
	(f)  An insurer shall maintain documentation and records relating to each derivative transaction including  
		(1) each purpose of the transaction;  
		(2) the assets or liabilities to which the transaction relates;  
		(3) the specific derivative instrument used in the transaction;  
		(4) for over-the-counter derivative instrument transactions, the  
			(A) name of the counterparty; and  
			(B) market value of the instrument; and  
		(5) for exchange-traded derivative instruments, the  
			(A) name of the exchange;  
			(B) name of the firm that handled the trade; and  
			(C) market value of the instrument.  
	(g)  Each derivative instrument held must be  
		(1) traded on a qualified exchange;  
		(2) entered into with, or guaranteed by, a business entity;  
		(3) issued or written with the issuer of the underlying interest on which the derivative instrument is based; or  
		(4) entered into with a qualified foreign exchange.  

Authorities

21.06.090;21.18.010;21.18.030;21.18.040;21.21.010;21.21.020;21.21.255;21.21.420

Notes

Reference

3 AAC 21.271
3 AAC 21.365

Authority

AS 21.06.090 AS 21.18.010 AS 21.18.030 AS 21.18.040 AS 21.21.010 AS 21.21.020 AS 21.21.255 AS 21.21.420

History

Eff. 1/1/2011, Register 196