Reversing an earlier decision, the New York State Insurance Department decided that captive reinsurance arrangements are legal under the state's insurance laws.

The department has what amounts to extraterritorial authority; if an insurer does something in another state that is illegal under New York's insurance laws, the department can bar it from selling insurance in New York.

In captive reinsurance, a lender receives part of the mortgage insurance premium and assumes some of the risk.

In a Feb. 1 letter to mortgage insurers, the department said it had determined that such arrangements are legal as long as they "are in the form of arm's-length reinsurance agreements with properly capitalized insurers."

In 1997 the department had declared captive reinsurance illegal. The department is trying to ensure that lenders were assuming risk in proportion to their share of the fees, and not just taking what amount to kickbacks.

Last week's letter deemed "un-captive captives" illegal. These are arrangements which let lenders reinsure loans without setting up new corporations. The agency also deemed illegal the issuance of "performance notes," whose interest rate is based on the performance of loans that an insurer underwrites, and some forms of pool insurance that the department believes are underpriced.

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