Gambling on the Lives of Corporations: STOLI, the Insurable Interest Doctrine, and the Ethics of Credit Default Swaps

Abstract

Among the most vexing financial products to arise in the last few decades are so-called stranger-originated life insurance policies, or “STOLI,” whereby the elderly are encouraged to take out life insurance policies on themselves and then sell these policies to investors who hope to profit from their speedy demise. In addition to raising serious ethical questions about the appropriateness of what amounts to a wager on human life, US courts have cited the perverse incentives generated by STOLI—even to the point of invalidating many STOLI arrangements. In this paper we review some of the major ethical and legal objections to STOLI and then argue that these same concerns and criteria are even more salient with respect to the market for credit default swaps (CDS), which amount in most cases to a naked gamble on the lives of corporations. Just as legitimate life insurance is distinguished from mere speculation by the existence of an insurable interest in the life of the insured, we contend that the same standards of insurable interest ought to be taken into account in crafting a regulatory framework for the $8 trillion international market for CDS.