A credit derivative structured as a swap. One party is a lender facing a credit risk from a third party and the counterparty in the swap agrees to insure this risk in exchange for regular periodic payments (essentially an insurance premium). If the third party defaults the counterparty insurer will have to purchase from the the insured defaulted asset. In turn, the insurer pays the insured the remaining interest on the debt as well as the principal. See CREDIT EVENT.

An over-the-counter, ‘off balance sheet’ instrument, derived directly or indirectly from the price of a credit instrument. They take numerous forms, including swaps (e.g. credit default swaps and options), and are used to transfer the credit risk from one party to another, e.g. banks to insurance companies (insuritisation). The amount of credit derivatives transferred to insurers rose from zero in 1998 to 30 per cent in 2002 (www. vinodkothari.com/glossary).

Financial guarantees or other types of assistance that improve the credit of underlying debt obligations. Credit enhancement has the effect of lowering interest and improving the marketability of corporate bond issues, particularly when backed by insurance companies with high credit ratings. Financial reinsurance enhances the credit rating of the reinsured by improving ratios through ‘off the balance sheet’ transactions.

Event triggering the settlement of a credit default swap or total return swap. The event is chosen by the counterparties and could include payment default on a reference asset or other debt obligation; insolvency or a ratings downgrade of the reference asset.

A captive insurance company formed by banks to insure loans to clients.

UK: A decreasing term insurance to cover the outstanding debt under hire purchase and credit sale agreements. Cover is provided under a collective policy to the creditor, e.g. finance company, to facilitate repayment on the death of any hirer or debtor. Arrears are not covered. Limits are placed on the age attained (e.g. 60 or 65) of any hirer or debtor and the length of the finance agreement (e.g. three years). Premiums are based on the average outstanding debt in accordance with returns supplied by the assured.
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Insurance issued to a creditor (lender) to cover the life of a debtor (borrower) for an outstanding loan.
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This type of life insurance pays the balance of a loan in the event the borrower dies before the loan is repaid. There are two common ways to purchase credit life insurance. One way is to purchase the coverage from the lender. This is normally a group life insurance policy with a flat rate per $1,000 borrowed regardless of age or health. Coverage decreases as the loan balance decreases. The lender is the beneficiary and upon the death of the insured the loan is repaid and there is no money left over.Alternatively, a borrower can purchase a decreasing term insurance policy. This is a term insurance policy for a fixed term (for example, 30 years to cover a mortgage) and coverage decreases each year at the same rate a mortgage at a certain interest rate would decrease. The borrower may name the lender as primary beneficiary but can name anyone. If there is more money from the death benefit than is owed the lender, the balance goes to the contingent beneficiary.Some lenders may add credit disability to a credit life policy. This coverage pays the insured’s regularly scheduled loan payments for some specified time period such as 1 or 2 years.
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MEDICAL,USA: Type of decreasing term insurance calculated to pay the balance due on a loan, installment purchase, or other obligation, in case the borrower dies before the loan is repaid. Another form is credit group life insurance for insuring lives of a group of persons who are in debt to a creditor.

Protection for repayments on a personal loan, mortgage or credit card or regular financial commitments. It meets repayments for a specified period following involuntary unemployment, accident or sickness and, usually, a death benefit is added. Policies are normally sold when the loan is arranged through banks, retailers, motor dealerships, mortgage and other finance providers. See CREDIT CARD REPAYMENT PROTECTION.

Risk of financial loss from a customer’s or counterparty’s failure to settle financial obligations as they fall due. Companies respond with credit management and may also effect credit insurance. Companies making bond issues may seek guarantees from insurance companies with higher credit rating through a credit enhancement process. The credit risk is transferable from the financial market to the insurance markets through CDOS and CMOs.
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Involves the insolvency of the purchaser of exports.

The structuring of a portfolio of credit risks into different layers. See CDOS; CMOS; CREDIT DEFAULT SWAPS; INSURITISATION.