What is bond insurance?
A municipal issuer may obtain insurance from a bond insurance company, sometimes referred to as a “monoline” insurance company, in connection with the issuance of its bonds for the purpose of providing protection for investors against possible payment defaults by the issuer. In other cases, bonds may have initially been issued without bond insurance but a broker-dealer or bank may afterwards obtain so-called secondary market bond insurance on all or part of the issue. In the event of a payment default by the issuer, the bond insurance policy would in most cases provide for the insurer to pay the principal and interest on the bonds as originally scheduled, rather than accelerating payment in a single lump-sum.
Bond insurance is a type of credit enhancement. A bond insurer unconditionally and irrevocably guarantees that interest and principal will be paid as scheduled—on time and in full—even if the bond issuer defaults. If a bond carries insurance, it typically is insured in the primary market, at the time of issuance, but it may be insured at any time in the secondary market. For some small municipal issuers, access to capital markets is made more affordable by the use of a credit enhancement like bond insurance. Many of today’s municipal bonds are insured by monoline insurers, or insurers that back debt securities only and are not exposed to risks from any other lines of business. They may, however, be exposed to other forms of risk (i.e., interest rate risk, market risk, etc.) Monoline insurers must meet the requirements of insurance regulators in every state where they do business. They are closely monitored by the major credit rating agencies. Monoline insurers conduct an underwriting p
