Credit Default Swaps: A Brief Insurance Primer

This article originally appeared in the September/October 2008 issue of AKO'S Policyholder Advisor

Credit Default Swaps ("CDS") are part of a $62 trillion market, that have gone from obscure to infamous in a matter of months, if not weeks. Yet along the way, many people were left without a clear understanding of what CDS are—particularly, in what ways CDS are like or unlike insurance. In brief, a CDS is like insurance insofar as the buyer collects when an underlying security defaults or loses value in some other way defined by the contract. It is unlike insurance, however, in that the buyer need not have an "insurable interest" in the underlying security.

Defined as Similar to Insurance