On a number of occasions, I have noted that it has been illegal to take out insurance on something in which one does not have an interest in its continued existence.<\/p>\n
So, it’s illegal to take out a policy on your neighbor’s house, because otherwise, you would have an interested in burning it down. <\/p>\n
This problem was first addressed, in the UK at least in the by the Marine Insurance Act of 1746<\/a>.<\/p>\n The proximate cause was people who would buy insurance on a merchant ship, and then leak the manifests and schedules to the French, who were at war with the British at the time, and they would collect the insurance payouts.<\/p>\n It has been the law for longer then there has been the United States.<\/p>\n Only in the late 1990s, they decided that it did not apply to credit default swaps, and so the ripe-for-abuse “naked” CDS was born.<\/p>\n