My neighbor keeps a lot of flammable items in his home and I just know that it is going to explode in flames, Good thing there is always a way to restore it, Just click here. Can I buy insurance on his house and collect a payout when it inevitably burns down? For that matter, could I also buy a life insurance policy on my neighbor? I noticed that he spends a lot of time at home.
In America, an insurance company requires that you have an economic interest in something before issuing a policy. This makes it difficult to take out insurance on your neighbor’s house unless you can demonstrate that his burning house will hurt you financially.
A way around this is to have your neighbor take out his own insurance policy, then have you pay him some fixed premiums. In return, he signs a contract that turns the insurance benefits over to you.
The name of this contract is a credit derivative. Credit derivatives on insurance policies are used on everything from bank loans (these are called credit default swaps) to life insurance (longevity swaps).
Most of the time, derivatives are governed by CFTC rules which can make them a pain in the butt to buy and sell. However, the CFTC has issued a no-action letter in the case of life insurance swaps. This may be your best bet, although I imagine the conversation with your neighbor may be awkward.
In summary, there are three ways to gamble on events in the US. First is to call it insurance, and be able to demonstrate that you have an economic interest in the outcome. Second is to call it a derivative, and be prepared to deal with CFTC regulations. Third is to just call it what it really is, which is a bet. Claims on bets generally don’t hold up in court, so you will need to employ a group of thugs to break your counterparty’s knees should they fail to pay up.