(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. § 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.

(Repealed and added by Stats. 1993, Ch. 232, Sec. 2. Effective January 1, 1994.)