The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires the CFTC and SEC to set up a new system for regulating swaps. The new rules could affect the swaps insurers use to hedge their own investments, and, in theory, the rules also could affect the insurance products that insurers sell.

The agencies began asking for public comments on the definitions needed to implement the regulations about a year ago.

In summaries released in April, the CFTC and the SEC said they would automatically exclude insurance products that met a multi-part test from the definition of the term "swap," and that they also would exclude several common insurance products from the definition.

The agencies now have published an 83-page collection of proposed swaps rules and interpretations in the Federal Register. A discussion of the insurance products exclusion takes up about seven pages.

The Dodd-Frank definition of "swap" includes "any agreement, contract, or transaction that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence."

The CFTC and the SEC want to avoid letting the Dodd-Frank definition turn insurance products into swaps, but they also want to keep loophole seekers from dressing swaps up as insurance products to avoid swaps regulation, officials say.

The agencies would exclude an arrangement from the definition of "swap" if the arrangement:

• Requires the beneficiary to have an insurable interest throughout the duration of the arrangement.
• Requires the covered loss to occur and to be proved, with any payment being limited to the value of the insurable interest.
• Is not traded, separately from the insured interest, on an organized market or over-the-counter.

In addition, the provider of the arrangement would have to be an insurer or reinsurer regulated by a state insurance commissioner or the equivalent, a non-U.S. reinsurer, or a federal government program.

The CFTC and SEC also are proposing a second method for excluding insurance products from the swaps definitions—excluding many specific types of common insurance products.

The list includes:

• Surety bonds.
• Life insurance.
• Health insurance.
• Long term care insurance.
• Title insurance.
• Property and casualty insurance.
• Annuity products on which the income is subject to tax treatment under Section 72 of the Internal Revenue Code.

Officials are asking for comments about whether requiring the presence of an insurable interest is an effective way to determine whether a product is insurance; whether shutting out actively traded products makes sense; and whether the list of common insurance products that are clearly not swaps is complete.

 Comments on the proposed rules are due July 22.

Allison Bell is senior web editor for National Underwriter Life & Health.