Between The Numbers

Allstate CDS Disclosure Should Encourage Others

Since most CDS are company to company, I wouldn't go so far as to demand the heavy-hand of insurance regulation in that arena. However, treating them more like standard derivatives with a central clearinghouse, widespread disclosure, collateral posting, and margin calls based on mark-to-market valuation would be a great start. The regulation of insurance attempts to completely remove the counterparty risk for the insured, something that is almost impossible to do between two companies. If only AAA rated companies could issue CDS, then they pretty quickly wouldn't be AAA due to the nature of CDS contracts (potential for huge losses on a small income stream). Disclosure of outstanding CDS will help companies evaluate the counterparty risk when buying a CDS (the person with money on the line should do the homework) instead of an opaque system where we trust an unmotivated regulator.
When a put writer's contracts start blowing up, we don't wait until expiration date to demand margin maintenance. Having to post collateral would significantly limit the implied leverage that a CDS writer could take on.
CDS are risky to the point that I would like to keep them as far away from the vanilla insurance business as possible.