Are credit default swaps insurance products?

The National Ordinance on the supervision of the Insurance Business (“NOSI”) does not contain a definition of ‘insurance agreement’. Under Netherlands Antilles law the definition contained in article 315 of the Netherlands Antilles Commercial Code is usually used, which informally translated reads as follows:

Insurance is an agreement whereby an insurer commits itself to the insured, against receipt of a premium, to compensate the latter for a loss, damage or loss of expected advantage which the insured could suffer as a result of an uncertain event.

Will insurance issues under Netherlands Antilles law be triggered when entering into a credit default swap (CDS)? If the fund manager acts as the protection seller under a CDS, there is some risk of breach of insurance regulations for the manager. If the manager is the protection buyer under the CDS, the risk will be for the swap counterparty.

There is no existing case-law or regulatory directive in the Netherlands Antilles offering any direct guidance as to the question whether credit derivatives constitute insurance products.

The insurance business in the Netherlands Antilles is regulated by the NOSI. If credit derivatives were to constitute insurance contracts in the Netherlands Antilles then merely offering them from a company with a statutory seat in the Netherlands Antilles or from a company with a statutory seat outside the Netherlands Antilles with an establishment in the Netherlands Antilles would constitute conducting insurance business, and the requirements of the NOSI would be triggered when entering for the first time into a credit derivative as ‘insurance seller’ from the Netherlands Antilles or with a Netherlands’ Antilles counterparty as the ‘insurance buyer’.

Insurance companies (i.e. entities which make it their business to offer insurance products) established in the Netherlands Antilles and insurance companies with a statutory seat outside the Netherlands Antilles which have an establishment in the Netherlands Antilles, are required to obtain a license from the Netherlands Antilles Central Bank.

Provision of insurance services in the Netherlands Antilles without the required license or registration is penalized. In principle, such offences are punishable by a maximum fine of NAF 50,000 per violation and imprisonment of a legal entity’s managing director for the maximum term of six months. In addition, violation of these requirements may have civil law consequences: the agreement with the client may be declared null and void.

There is no Netherlands Antilles case law or literature available which makes clear whether a CDS constitutes the ‘conducting of insurance business’ under Netherlands Antilles law. However, if certain requirements are met, credit derivatives will not qualify as an agreement of (non-life) insurance because such an arrangement would in those circumstances not contain all the elements necessary to qualify it as such.

Karel Frielink
Attorney (Lawyer) / Partner

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