One of the things that doesn't get mentioned much on the stories about finance, particularly credit markets, that is essential for understanding what the fuck is going on are what are called reserves.
You should know from high school economics & repeated christmas viewings of "It's a Wonderful Life" a bank/savings & loan/thrift works by taking in deposits of people's savings in exchange for a few pennies worth of interest and loaning the cash out again to other people for a dime or so in interest. With enough volume that all works fine and dandy unless a bunch of people suddenly decide to withdraw their savings in a "run on the bank".
In order to prevent these kinds of crises from happening by chance every time a new xbox or some other common call for cash occurs banks have to keep reserves of cash around. Once upon a time banks got to decide for themselves how much reserve they needed to keep but since reserves of cash don't bring in any money (and cost them interest) they persistently low-balled it and we eventually got the great depression.
So the government came in and told people how to run things. They set up an insurance scheme to cover really big runs, but they also mandated that banks had to keep certain levels of money on reserve backed up by regular audits which if you failed they would shut you down, auction off your stuff and send you to jail for bank fraud.
The thing is there is only a finite amount of savings at any one time. So your bank takes in the savings, makes out the loans up to the limit of the reserves and then it hits a wall. It's got these people working for it who's job is to make loans, but they can't do their job without breaching the reserve and sending somebody to jail. So what they do is try to clear up their balance books by selling a loan they made in the past to someone else. They then have more money to loan to people and keep those expensive loan arrangers working. The trade in those pre-made loans is what people mean by "credit markets" and when they talk about the credit markets "seizing" it means nobody wants to buy your bank's old loans.
The thing that most people have a hard time understanding is that insurance companies are essentially funky "banks". The premiums you pay are like bank deposits, and the payouts they make if an accident occurs are like you withdrawing the money. In the mean time the insurance company takes the money it has sitting around and uses it to make more money (often by buying old loans from banks). And just like banks can suffer runs, insurance companies can get in the same sort of jams. A freak icestorm that results in a bunch of car crashes in a town, hail storm tears up a bunch of roofs, hurricane wipes out the gulf coast. You wind up with a lot of payouts but the insurance company doesn't have enough cash on hand and you wind up with a bankrupt insurance company and a bunch of screwed over people.
So the government tells them what to do as well. They mandate reserves insurance companies have to keep on hand just like they do banks. And there is also a secondary insurance market (reinsurance) like there is a secondary credit market.
Naturally, considering the greedy grasping nature of the cocksuckers in expensive suits that tend to populate the ranks of banks and insurance companies, there are lots of attempts to game the system.
One of the central players in many of such games of late was AIG. Check out this article
on some of the chicanery they have already been proved in court to have engaged in.