Glossary

A credit default swap is a contract in which the buyer makes one or a series of payments to the seller in exchange for a promise that, if a specific credit instrument, such as a bond or loan, goes into default, the seller will pay the buyer a certain sum. In effect, the seller of the swap is providing a guarantee that if the bond (that is the subject of the credit default swap) defaults, the seller will pay the buyer a specified sum of money. Numerous credit default swaps were bought/sold in conjunction with mortgage-backed securities that were issued in conjunction with subprime real estate loans in the mid-2000s. Although credit default swaps are often compared to insurance contracts, one important difference is that, with an insurance policy, the policyholder must also own the property being insured. In contrast, the buyer of a credit default swap need not be the owner of the financial instrument for which the swap is providing a financial guarantee. Credit default swaps facilitate speculation (by buyers) as to whether a certain credit instrument will default. Another key difference from insurance is that the seller of a credit default swap—unlike an insurance company—is not required to maintain a specific level of reserves in the event that the subject instrument (e.g., a mortgage-backed security) defaults, and the seller must pay the buyer of the credit default swap. In 2008, AIG Insurance Company's failure to maintain adequate reserves on the billions of dollars in credit default swaps it sold was the major cause of the company's near-collapse.

Credit for reinsurance is a statutory accounting procedure permitting a ceding company to treat amounts due from reinsurers as assets or reductions from liability based on the status of the reinsurer.

Credit health insurance is insurance designed to cover a borrower's indebtedness with the creditor receiving the policy benefits to pay off the debt if the borrower becomes disabled or dies accidentally. Credit insurance can be written as an individual policy for a single borrower or group coverage for a number of debtors with the creditor as master policyholder.

Credit insurance is coverage against insolvency of a customer, which provides protection against payment default on loan, interest, or scheduled payments. It is also known as "bad debts" insurance.

Credit life insurance refers to term life insurance that pays off the balance of a loan if the borrower dies. It is usually sold by banks or finance companies to their customers at the point of sale.

Credit monitoring is a service provided within the privacy notification and crisis management insuring agreement of a cyber and privacy insurance policy. Credit monitoring is offered immediately following a data breach in which the personally identifiable information (PII) of various persons is exposed. Such monitoring includes but is not limited to the monitoring of one's credit history (typically for 1 year) to detect any suspicious activity or unauthorized charges. It also provides regular access to one's credit history as well as special alerts when there are significant changes to one's credit history.

A credit report is an underwriting tool used by insurers. Some individuals or companies with poor credit records may be more likely to have insurance claims. For example, a person with financial difficulties may not have the funds to repair or replace an aged roof, which increases the chance of a water damage loss. People with major financial problems may be more inclined to stage or exaggerate a loss in the effort to collect more money from the insurer. Research also indicates that a person who is less responsible about the use of credit is more prone to be less responsible while driving. For commercial lines accounts, credit reports such as Dun and Bradstreet are often ordered and can play an important role in the selection process and the pay plan offered.

Credit risk refers to the possibility that either one of the parties to a contract will not be able to satisfy its financial obligation under that contract. The classic example is that of one commercial enterprise extending credit to another enterprise or individual. Many insurance arrangements, especially finite risk programs, also involve varying degrees of credit risk—on both sides of the transaction—depending on the financial stability of the parties. Since insurance and reinsurance companies are leveraged (i.e., their capital supports many times its value in outstanding policy limits), an unforeseen number of severe losses could impair such capital. While it is generally assumed that credit risk is borne by the insured or ceding insurer (under a reinsurance contract), insurance and reinsurance companies also bear credit risk.

A credit wrap is a form of financial guarantee insurance, covering not all debts of the borrower but a specific loan, debt issuance, or other financial transaction.

Crisis, in risk management context, is any unplanned event or series of events that can cause death or injury to employees or the public or that can disrupt operations, cause physical or environmental damage, shut down the organization, or threaten the organization's financial standing or public image.