[travisluis]

> And the insurance market.

No. Insurance is subject to the "insurable interest" doctrine, which generally prohibits using insurance as naked speculation. There are also far more backstops, reserve requirements, government guarantees, etc., designed to prevent this kind of implosion. Not saying it doesn't happen, but we've had since the South Sea Bubble to learn how to regulate insurance to prevent this kind of thing.

The key difference is that insurance is generally regulated from a consumer protection perspective, since many insurance lines are sold directly to unsophisticated consumers. CDSs are, by contrast, sold primarily these days to sophisticated financial speculators, who are presumably fully aware of the kinds of risk involved.

[dh2022]

Huh? People use Credit Default Swaps (CDSs) for decades to speculate on debt defaults...

"South Sea Bubble to learn how to regulate insurance to prevent this kind of thing." - AIG (at the time the biggest insurance company in the US) went down in 2008 during the Great Financial Crisis because they insured sub-prime loans (CDS again).. So I guess there are lots of holes regulators still need to learn....

[occamrazor]

CDS are credit derivatives, not insurance contracts. There is credit insurance, but it only covers a company’s own receivables (or payables).

[danielmarkbruce]

People are absolutely using credit default swaps to insure against risk.

[danielmarkbruce]

And yet insurance companies go belly up. Google "failed insurance companies". Remember just 15 years ago? MBIA, Ambac, AIG?

Regulation doesn't get rid of the risk. And it's got zero to do with naked speculation. We simply cannot make risk disappear. Contracting with someone else to eat the risk creates a new risk. Counter party risk just doesn't go away, despite our hopes and dreams.

[bombcar]

Even with insurable interest you can have an insurance company wiped out by fraud, mistakes, or (most likely perhaps) a mass event that causes claims at the same time.

This is why flood and earthquake insurance often end up being (underfunded) and run by the state.