In the early 1990s, several insurance companies in Scandinavia lost a lot of money on credit insurance. They insured financial institutions from losses on mortgages in the event that the borrower did not pay back the loan. During the economic recession, the property values fell and many borrowers defaulted. These insurance companies had to be recapitalised.
15 years later, other insuranced companies have started to issue credit default swaps. They are like the credit insurance, except that the magnitude of the bets are of an unimaginable scale and they are unregulated entirely.
Could the insurers have forgotten the lessons of the 1990s? I do not think so. These new gamblers are either arrogant (i.e. they think that they found a new way to manage the risk) or reckless (i.e. they wanted to make a lot of profit now, and let the system collapse later).
The regulators were also negligent in not stopping these reckless bets.
Tan Kin Lian
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