Novation In Reinsurance: Fill & Download for Free

Legal status/Credit risk:There are stringent requirements for an insurance company to actually be able to pay out in case of an event happening. With a CDS, your counterparty can go bankrupt just like with any OTC trade.Technicalities:Your insurer doesn't normally take over your house when it burns down. They hand you the money. The guy who is selling CDS protection does get the bonds when the credit event occurs. However I'm not sure this difference is essential; someone could invent a CDS that just pays cash on the bond price (though in the event of a default, that might be hard to find. These things aren't always liquid). Or someone could invent an insurance where the insurer takes over the burned down house.Novation: Through a set of PB/Counterparty agreements, the holders of a CDS can change. For instance, if you buy protection at one bank and sell it at another (both against your PB), you might want these trades to cancel each other out. You'd then have to ask one of the banks to hand over their end of a trade to the other to do the cancellation. I'm not sure how general insurance works, but I believe the normal contracts between the consumer and the insurer are not novated like this (then again, I don't read the fine print). The risk can still be reinsured to move the financial risk.Culture: Insurers hire actuaries to look at historic data. It seems they use different models to financial traders, based on talking to a friend of mine. It takes a long time to qualify, and I wonder whether being in a naturally short skew environment doesn't give them a bit of insight that the rest of the financial world could use. (As you can tell, this last bit is speculative.)Bottom line is that they ain't that different. You're swapping (hence CDS) a periodic premium for protection against some event.

Yes, you do need one.Here are two links that could aid you:http://www.isda.org/http://www.fimmda.org/download/general/FAQs-on-CREDIT-DEFAULT-SWAPS.doc.aspx :The following documents are required to be filled in to start buying and selling of CDS:(i) A CDS contract is typically documented under a confirmation referencing the credit derivatives definitions as published by the International Swaps and Derivatives Association (ISDA). This document is called as the Master Confirmation Agreement (MCA).a. The confirmation typically specifies a reference entity, a corporation or sovereign that generally, although not always, has debt outstanding, and a reference obligation, usually an unsubordinated corporate bond or government bond.b. The period over which default protection extends is defined by the contract effective date and scheduled termination date.c. The confirmation also specifies a calculation agent who is responsible for making determinations as to successors and substitute reference obligations (for example necessary if the original reference obligation was a loan that is repaid before the expiry of the contract). By market convention, in contracts between CDS dealers and end-users, the dealer is generally the calculation agent, and in contracts between CDS dealers, the protection seller is generally the calculation agent.d. CDS confirmations also specify the credit events that will give rise to payment obligations by the protection seller and delivery obligations by the protection buyer.Standard CDS contracts specify deliverable obligation characteristics that limit the range of obligations that a protection buyer may deliver upon a credit event.ISDA Documentation:Master Agreement (including Schedules to Master Agreement)ConfirmationsISDA DefinitionsCredit Support Document (CSA)Novation Agreement