https://www.insurerbrain.com/w/index.php?action=history&feed=atom&title=Definition%3ACredit_default_swap_%28CDS%29Definition:Credit default swap (CDS) - Revision history2026-06-13T21:12:57ZRevision history for this page on the wikiMediaWiki 1.43.8https://www.insurerbrain.com/w/index.php?title=Definition:Credit_default_swap_(CDS)&diff=10709&oldid=prevPlumBot: Bot: Creating new article from JSON2026-03-11T16:55:47Z<p>Bot: Creating new article from JSON</p>
<p><b>New page</b></p><div>🔄 '''Credit default swap (CDS)''' is a derivative contract in which one party pays periodic premiums to another in exchange for compensation if a specified [[Definition:Credit risk | credit event]] — such as a bond default or bankruptcy — occurs on an underlying reference entity. In the insurance and reinsurance world, CDS contracts intersect the industry in two important ways: insurers are significant investors in corporate and sovereign bonds whose credit risk can be hedged or amplified through CDS, and certain [[Definition:Monoline insurer | monoline insurers]] and [[Definition:Financial guaranty insurance | financial guaranty]] companies historically sold credit protection that functioned much like a CDS, blurring the boundary between insurance and capital-markets risk transfer.<br />
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⚙️ A CDS operates like a bilateral agreement: the protection buyer makes regular fixed payments — analogous to [[Definition:Insurance premium | premiums]] — to the protection seller over the contract's life. If the reference entity defaults, the seller compensates the buyer for the loss, either by purchasing the defaulted obligation at par (physical settlement) or paying the difference between par and recovery value (cash settlement). Unlike a traditional [[Definition:Insurance policy | insurance policy]], a CDS does not require the buyer to hold an insurable interest in the reference entity, which means it can be used purely for speculation. This distinction became painfully relevant during the 2008 financial crisis, when firms like AIG's Financial Products division had amassed enormous CDS exposures, triggering a liquidity crisis that required government intervention and prompted sweeping reforms to how [[Definition:Insurance holding company | insurance groups]] manage [[Definition:Enterprise risk management (ERM) | enterprise risk]].<br />
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⚠️ Regulators and [[Definition:Rating agency | rating agencies]] now scrutinize insurers' CDS exposure — both as buyers hedging investment portfolio risk and as sellers of credit protection — as part of their assessment of [[Definition:Solvency | solvency]] and capital adequacy. The [[Definition:National Association of Insurance Commissioners (NAIC) | NAIC]] and international bodies like the [[Definition:International Association of Insurance Supervisors (IAIS) | IAIS]] have imposed stricter reporting and capital charges on derivative positions, and most jurisdictions prohibit licensed insurers from writing naked CDS protection without adequate [[Definition:Reserves | reserves]]. For [[Definition:Insurance-linked securities (ILS) | ILS]] market participants and reinsurers, CDS mechanics also inform the design of credit-contingent [[Definition:Catastrophe bond | catastrophe bonds]] and other hybrid instruments that blend insurance and capital-markets risk transfer.<br />
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'''Related concepts:'''<br />
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* [[Definition:Financial guaranty insurance]]<br />
* [[Definition:Enterprise risk management (ERM)]]<br />
* [[Definition:Insurance-linked securities (ILS)]]<br />
* [[Definition:Credit risk]]<br />
* [[Definition:Counterparty risk]]<br />
* [[Definition:Derivative]]<br />
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