The public comment period ended Monday for a proposed rule that could ease decision-making for New York-domiciled insurers considering whether to add bond exchange-traded funds.
The rule, proposed by the New York State Department of Financial Services, would allow ETFs to be treated as debt for purposes of risk-based capital, or RBC, reporting provided certain criteria are met, according to attorney Daniel A. Rabinowitz, a New York-based partner at Kramer Levin Naftalis & Frankel, where he chairs the insurance practice. "And that's pretty huge, because the difference between treating something as equity for RBC purposes and debt for RBC purposes is orders of magnitude," Mr. Rabinowitz said in an interview. "You have to hold much, much more capital against equity securities."
Consequently, for insurers evaluating whether to own bond ETFs, "this could be a very significant event in moving the needle," he said.
According to the proposed rule, until Jan. 1, 2027, shares of an ETF shall be treated as bonds for the purpose of a domestic insurer's RBC report, provided the fund meets certain criteria. Among them, the ETF must track a bond index and have a minimum of $1 billion in assets under management. The rule was published in the New York State Register on Sept. 22.
DFS "will issue its assessment of public comments and then plan to adopt the regulation," a DFS spokeswoman said.
The proposed rule would also extend the RBC treatment "extraterritorially," meaning that a New York-licensed insurer domiciled outside of New York state would also be required to calculate its RBC consistent with the new rule, Mr. Rabinowitz said.
That New York would seek to apply its laws to insurers domiciled in other states isn't surprising, Mr. Rabinowitz said. However, what's unusual is that rules coming out of New York tend to be more restrictive than those in other states, he said, adding that RBC rules currently tend to be fairly uniform from state to state.
"So, it's noteworthy that they would make this kind of thing more permissive and then also apply it extraterritorially," Mr. Rabinowitz said.
While it's not unusual for insurance regulations to sunset so that a state like New York can "test run" a rule to see how it's working, such sunsetting is less common with regard to how things are classified for accounting purposes and reported to a regulator, Mr. Rabinowitz said regarding the Jan. 1, 2027 date.
"I do see it as a little bit unusual for this kind of regulation, but not for insurance laws in general, which sunset on occasion," he said.