This paper introduces insurer default risk as a quality dimension of the insurance product in a basic insurance model. Insurers choose their default risk by deciding on precautionary measures to ensure solvency when competing for clients, resulting in vertical product differentiation. Clients differ in risk aversion, and more risk-averse clients self-select to purchase from the insurer with the lower default risk. I show that a unique price equilibrium exists for any pair of default risks, where the insurer with the lower default risk has larger profits. As a result, market discipline in the choice of default risks emerges: the first mover chooses a low default risk, and the second mover follows at an optimal distance. I discuss the results in the context of over-the-counter derivatives markets.