[quote=UCGal]Excuse my ignorance. But isn’t life insurance, car insurance, home owners insurance well regulated. Are the issuers required to have a decent percent of capital to back up the policies they write?
And weren’t CDS’s unregulated, and there weren’t requirements for capitalization?
I think that is the key difference.
It’s like comparing a State Farm Car Insurance policy (picked an insurance brand randomly) to paying some street thug $5 to make sure your car isn’t vandalized when you have to park in a bad neighborhood. The first you purchase with a confidence that it’s well regulated and backed with assets. The other you know has inherant risk. When you purchase the latter type of “insurance” you know the kid you’re paying off may or may not stick around and watch your car.[/quote]
They’re supposed to be regulated but then so are the banks and they got into all of the trouble they did. Honestly though you have to recognize what the insurance business model is. In the case of inadequate capital be it a natural disaster that takes out to many covered assets to pay out or the insurance company plays with investments they shouldn’t and takes losses, they can’t pay out on all of the claims covered at once. They likely can only pay a small fraction. How much faith do you put in your insurer with that in mind?
If they are allowed to write too many policies in excess of the ability to pay a very reasonable amount of them then they should not be in business. Somehow aside and beyond that banks wrote “fog a mirror” loans and got themselves into death spiral trouble. You can’t let the depositors take the damage or everyone will lose confidence in the currency and the gov’t ability to back that currency. Seeing the gov’t not use it’s ability to back insurance policies has nowhere near the detrimental effect.
