Are there differences in the way in which derivatives and insurance contracts are regulated?
Yes. Weather derivatives and insurance contracts are subject to totally different regulatory regimes. Derivatives are subject to the Commodity Exchange Act (CEA) and are regulated by the Commodity Futures Trading Commission (CFTC)[1]. Insurance products, on the other hand, are regulated by the various State insurance commissioners, each of which has specific jurisdiction over insurance companies that are domiciled in or doing business in that particular State. For example, weather derivatives are frequently structured as products included in the definition of swaps, and the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)[2] provides that (1) swaps cannot be considered to be insurance; (2) products traditionally regulated as insurance cannot be regulated as swaps; and (3) a swap “shall not be considered to be insurance” and “may not be regulated as an insurance contract under the law of any State.”[3]
What differentiates weather derivatives from weather insurance?
It seems obvious to say that derivatives are not insurance and insurance contracts are not…
