I didn't get the impression it was supposed to be insurance, but more akin to shorting a stock, industry, etc. This is an informed bet, not paying for accident insurance, IMHO.
It can be an informed bet, sure - but recent history shows that it's often not an informed bet, and when the bet went wrong in a spectacular fashion for AIG, AIG had to go to Uncle Sam with hat in hand else the world economy would grind to a halt.
Again, CDSs are insurance in all but name only - you pay a premium, and if a trigger event happens, you get a payout. This worked out great for the guys who figured out the misrepresentation of risk in the mortgage backed security market, not so great for the guys who sold them $100 million 10 year CDSs on CDOs for $2 million a year premiums.
Apropos the subject, Michael Lewis's "The Big Short" details the experiences of some of the first investors to avail themselves of the opportunities provided by CDSs, and is an interesting and informative read.
When shorting a stock, one is required to post assets sufficient to buy the stock back if the price rises, and assets which are posted to cover one short position cannot simultaneously be used to cover others.
With credit default swaps, there is from what I can tell no requirement that one have or maintain any assets related to all the different swaps one sells, nor is there any way for a prospective buyer to know all of the swaps a particular seller has outstanding. Someone with $10,000,000 in assets could write and sell $100,000,000 worth of credit-default-swaps protecting an asset with a 1% risk of failure; 99% of the time, the person would be able to simply pocket all the money with nobody being the wiser. When the 1% hits, he welshes on his bets.