The perverse incentive for insurance instruments that are derivatives: solving the jackpot problem with a clawback lien for default insurance notes. (arXiv:1711.02600v1 [q-fin.GN])

When an insurance note is also a derivative a serious problem arises because a derivative must be fulfilled immediately. This feature of derivatives prevents claims processing procedures that screen out ineligible claims. This, in turn, creates a perverse incentive for insured holders of notes to commit acts that result in payment. This problem first surfaced with CDS contracts, which are part of a class of loan insurance I term a default insurance note.