National News
Viewing comments for:
Credit Default Swaps Should Be Regulated As Insurance
National News • July 7, 2009
Credit default swaps nearly brought down the world financial system last fall when it was discovered that AIG Financial Products had written hundreds of billions of dollars worth of credit ...
Insurance Journal is not responsible for the content of the message below.
| Subject | Posted By | Posted On |
|---|---|---|
| RE: Credit Default Swaps as Insurance | Fred Fisher | Jul 14, 2009, 10:59 am |
| Credit Default Swaps as Insurance | Mike D | Jul 8, 2009, 6:59 am |
| RE: RE: wrong forum | SWAP watcher | Jul 7, 2009, 4:59 pm |
| RE: RE: wrong forum | Bill Rempel | Jul 7, 2009, 2:53 pm |
| Regualted no- Banned and Criminalized- yes | Fred Fisher | Jul 7, 2009, 2:51 pm |
| RE: wrong forum | kathi | Jul 7, 2009, 1:10 pm |
| wrong forum | prakash v. naor | Jul 7, 2009, 11:39 am |
| RE: 3 Reasons CDS Are NOT Insurance, | Jeff | Jul 7, 2009, 10:40 am |
| 3 Reasons CDS Are NOT Insurance, | Bill Rempel | Jul 7, 2009, 8:22 am |
| Back to article | ||
Subject: 3 Reasons CDS Are NOT Insurance,
2) Assignability of contract
3) Duplication of coverage
Large quantities of CDS are written and traded without the recipient/purchaser actually owning the underlying security. Without a verified insurable interest in the asset being protected, the CDS is most certainly NOT insurance.
Insurance policies are not assignable. They are a contract between two parties, and the insured does not have the ability to transfer the benefits and/or his/her role in the contract to another party. CDS are speculative tools (that may, or may not, be used for risk control) and are not insurance contracts.
The purpose of insurance contracts is to indemnify insureds, and the loss can only be made whole once. On the other hand, there may be CDS trading for a particular debt security whose nominal value far exceeds the actual value of the underlying security.
To put it bluntly, an insurance policy is when YOU take out a contract to protect your house from burning down, the insurance company verifies it's your house, and no matter how many policies you buy, you only get paid for your house once if it's lost.
But a CDS allows me, Fred, Martha, and Wilma to take out contracts indemnifying US for when YOUR house burns down. Fred could sell his contract to Darlene and make a profit. The total payout for the CDS on your house could exceed the total value of your house by several times.
It should be obvious by now to anyone who understands insurance that a CDS is NOT an insurance product.