Bond Insurance Explained

Bond insurance is a type of financial protection that helps investors recover losses if a bond issuer defaults on their payments. This insurance is usually purchased by investors who want to reduce their risk of losing money.

It works by transferring the risk of default from the investor to the insurance company, which then covers the loss if the issuer defaults. This can provide peace of mind for investors who are concerned about the creditworthiness of the issuer.

Bond insurance can be used for a variety of types of bonds, including municipal bonds and corporate bonds. It's often used by investors who want to invest in bonds with lower credit ratings.

Bond insurance is a type of insurance that protects investors who buy municipal bonds by guaranteeing repayment of principal and interest.

Municipal bonds are debt securities issued by local governments and other public entities to finance various projects and activities.

Investors who buy municipal bonds are essentially lending money to the issuer, who promises to repay the loan with interest.

The issuer of a municipal bond is responsible for making timely payments to bondholders, but they can default if they run into financial difficulties.

Bond insurance helps mitigate this risk by providing a financial guarantee to investors in case the issuer defaults.

This guarantee ensures that bondholders receive their principal and interest payments on time, even if the issuer is unable to make payments.

By providing this protection, bond insurance helps to make municipal bonds more attractive to investors.

There are many types of insurance bonds, and they can be categorized into different types.

Let's take a closer look at some of the types of insurance bonds, including surety and fidelity bonds.

Surety bonds are a type of insurance bond that guarantees the performance of a specific obligation or contract.

There are many types of bonds, and even many types of surety and fidelity bonds. Let's take a closer look at some of the types of insurance bonds.

Commercial bonds are designed for businesses, while personal bonds are for individuals.

A surety bond is a type of insurance bond that guarantees a business will fulfill its obligations.

There are many types of surety bonds, including bid bonds, performance bonds, and payment bonds.

A fidelity bond protects businesses from employee theft and dishonesty.

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Federally insured credit unions can use approved bond forms without further NCUA approval, but they can be obtained from the NCUA's website or by contacting the NCUA at (703) 518-6330.

The NCUA Board must approve all bond forms before they can be used by federally insured credit unions.

You can find a list of approved bond forms on the NCUA's website, http://www.ncua.gov, or by contacting the NCUA directly.

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Federally insured credit unions cannot use any bond forms that have been amended or changed since the time the NCUA Board approved the form.

Any rider, endorsement, renewal, or other document that limits coverage of approved bond forms also requires NCUA Board approval.

Bond forms approved by the NCUA Board expire after 10 years, unless otherwise determined by the NCUA Board.

However, bond forms approved before 2019 will expire on January 1, 2029, unless otherwise determined by the NCUA Board.

A bond insurance policy is designed to protect the obligee, which is typically a business or government agency, from financial loss due to a principal's failure to fulfill their obligations.

The three parties involved in a bond insurance policy are the obligee, the principal, and the insurance company. The bond requires all three parties to be involved, which is a key difference from business insurance.

The cost of a bond insurance policy depends on the amount of the bond and the credit history of the principal. A less-than-perfect credit score can impact the bond cost.

Some businesses are more likely to need bond insurance due to the type of work they do or who they work for. These include construction companies, government agencies, janitorial services, and temporary staffing companies.

You'll need a license or permit bond to work with certain government agencies as a contractor. This type of bond is required to get a license for your profession.

A license or permit bond is a type of bond that guarantees a business will perform its contracted work and adhere to regulations. You may need one to work with a government agency.

Here are some examples of license or permit bonds:

A license bond pays your clients back when a contract is broken, while a permit bond covers the cost of accidents and lawsuits. You may need a bond to get a license for your profession.

The purpose of a license or permit bond is to guarantee that a business will perform its contracted work and adhere to regulations.

As a small business owner, you're likely no stranger to the importance of risk management. Bond insurance is a crucial tool in reducing the risks associated with your business, particularly in industries where theft or non-compliance is a concern.

A bonded insurance policy protects the obligee, typically a client or customer, in case the principal (that's you) fails to meet contractual obligations or commits a breach of contract. This can include things like not completing a job on time or not paying a balance due.

Construction businesses, government agencies, and janitorial services are among the industries that often require bond insurance. This is because these businesses often work with clients who require a level of assurance that the work will be completed to a high standard and on time.

A janitorial bond, for example, specifically addresses the risk of employee theft, which can be a significant concern for businesses in this industry. This type of bond can reimburse clients in the event of theft of money, stolen property, or contract requirements not being met.

Here are some examples of businesses that may need to get bonded:

By understanding the importance of bond insurance and which industries are most likely to require it, you can take proactive steps to manage risk and protect your business.

Being bonded is a condition of employment for many businesses, especially those in the construction industry. This means that a business must become bonded to secure a contract for work.

A bond requires three parties: the obligee, the principal, and the surety. The obligee is the one protected by the bond, while the principal is the business seeking the bond.

The cost of a bond depends on the amount of the bond and the business's credit history. A less-than-perfect credit score can impact the bond cost.

Many businesses need to get bonded due to the type of work they do or who they work for. These include construction companies, government agencies, janitorial services, and temporary staffing companies.

Here are some common types of businesses that need bond insurance:

Some businesses may need a payment bond to ensure payment for the obligee, while others may need a fidelity bond to reduce the risk of employee-related issues.

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The value of bond insurance to issuers is a significant one. It's estimated that the bond insurance industry has saved municipal bond issuers and their taxpayers $40 billion since its inception in 1971.

Borrowing costs are generally reduced for issuers of insured bonds because investors are willing to accept a lower interest rate in exchange for the credit enhancement provided by the insurance. This can be a major incentive for issuers to use bond insurance.

Municipal bond insurance premiums are typically paid up-front as a lump sum, while non-municipal bond insurance premiums are paid in periodic installments over time. This can help issuers budget and plan for their insurance costs.

The interest savings from bond insurance can be significant, often resulting in overall cost savings for issuers. This is why issuers will generally only use insurance when it results in cost savings.

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Investors purchasing or holding insured securities benefit from the additional payment source provided by the insurer if the issuer fails to pay principal or interest when due.

The value proposition of bond insurance includes the insurers' credit selection, underwriting, and surveillance of the underlying transactions.

Significantly, uninsured transactions are often not monitored by rating agencies following their initial rating issuance.

In the event of default of such transactions, bond trustees often fail to take appropriate remedial actions absent direction and indemnity from the bondholders.

Bond insurers frequently have the ability to work directly with issuers either to avoid defaults in the first place or to restructure debts on a consensual basis, without the need to obtain agreement from hundreds of individual investors.

Litigation to obtain recovery, should it be necessary, is the insurer's responsibility, not the investor's.

The insurance may also improve market liquidity for the insured securities.

The uninsured bonds of an individual issuer may trade infrequently, while bonds trading in the insurer's name are more likely to be actively traded on a daily basis.

Investors in insured bonds are also protected from rating downgrades of issuers, so long as the insurer is more highly rated than the issuer.

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A number of well-publicized municipal defaults, bankruptcies, and restructurings occurred following the global financial crisis of 2008, which proved that bond insurance remains valuable in the public finance market.

Holders of insured bonds were kept whole by Assured Guaranty and National Public Finance Guarantee in situations involving Detroit, Michigan; Jefferson County, Alabama; Harrisburg, Pennsylvania; Stockton, California, and Puerto Rico.

In the secondary market, insured bonds have generally exhibited significant price stability relative to comparable uninsured bonds of distressed issuers.

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Bond insurance is a type of protection that helps businesses prove trustworthy to their clients. A bond company offers either a surety bond or a fidelity bond, which can help a business with a murky financial history.

The principal pays the premium for the bond, so the obligee doesn't face financial risk in doing business with them. This is a key benefit of bond insurance.

A bond is more similar to a line of credit than an insurance policy. If the terms of the bond are broken, the surety company reimburses the client, and the business must then pay that amount back.

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There are different types of bonds, including payment bonds that ensure payment for the obligee. This can help reduce the risk for the obligee in contractual obligations.

A commercial bond involves three parties: the business (obligor), the client (obligee), and the insurance company (surety). This is the typical structure of a commercial bond.

Here's a breakdown of the roles in a commercial bond:

This structure helps to clarify the responsibilities and benefits of a commercial bond.

Federally insured credit unions are required to have a fidelity bond that covers their employees and operations. This bond must be purchased from a company holding a certificate of authority from the Secretary of the Treasury.

The minimum required amount of fidelity bond coverage varies depending on a credit union's total assets. Here's a breakdown of the minimum bond requirements:

A credit union's board of directors should consider its own internal risk assessment, fraud trends, and loss experience when determining the level of bond coverage to purchase.

As a federally insured credit union, you're required to have a fidelity bond to protect against employee dishonesty. At a minimum, your bond coverage must be purchased in an individual policy from a company holding a certificate of authority from the Secretary of the Treasury.

The requirement doesn't prohibit you from having a fidelity bond that also covers your credit union service organization (CUSO), but you must own more than 50% of the CUSO or it must be organized by you for handling certain business transactions.

The minimum required amount of fidelity bond coverage varies based on your total assets. Here's a breakdown of the minimum bond coverage requirements:

You should also consider purchasing additional or enhanced coverage based on your internal risk assessment, fraud trends, and loss experience. Your board of directors should review your circumstances and determine the need for increased coverage.

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Companies must comply with regulations, such as the General Data Protection Regulation (GDPR) in the European Union, which requires them to implement data protection policies and procedures.

The GDPR also gives individuals the right to erasure, or "right to be forgotten", which means companies must delete personal data upon request.

Companies can face significant fines for non-compliance, up to 20 million euros or 4% of their global annual turnover.

Regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, have the power to investigate and prosecute companies that fail to comply with regulations.

The FTC has brought numerous cases against companies for violating regulations, such as failing to provide adequate notice to consumers about data collection practices.

Companies must also comply with industry-specific regulations, such as the Payment Card Industry Data Security Standard (PCI DSS) for companies that process credit card transactions.

The PCI DSS requires companies to implement robust security measures to protect sensitive payment information.

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Bond insurance has a fascinating history that spans several decades. Prior to the 2008 financial crisis, bond insurers suffered few material losses, with notable exceptions including a 1984 loss by Ambac on its exposure to the Washington Public Power Supply System (WPPSS).

The value of bond insurance was established in part due to this loss. A 1998 loss by MBIA on its exposure to Allegheny Health, Education and Research Foundation (AHERF), which declared bankruptcy, was another significant exception.

In the mid-1990s, MBIA was considered an "almost perfect money machine" by BusinessWeek. By 1994, MBIA had seen only one loss.

By the late 1990s and early 2000s, about 50% of U.S. municipal bonds were insured. This high penetration of insurance in the municipal bond market was a testament to the growing demand for bond insurance during that time.

Today, the penetration of insurance in the municipal bond market is far lower than it was when numerous triple-A insurers were active.

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Bond insurance is often confused with other types of insurance, but it's actually quite different.

It doesn't address potential liability, unlike other business insurance, which focuses on protecting against financial losses due to accidents or negligence.

However, bond insurance helps to address potential risks that come from work a business is doing or internally from employees, making it a unique type of protection.

So, you're trying to decide between surety bonds and fidelity bonds. The main difference is that a surety bond protects the performance of a business, while a fidelity bond protects the business or business owner.

A surety bond is like a guarantee that your small business will fulfill its contract. If you fail to do so, the insurer reimburses your client. This can be due to failure to deliver services, incomplete work, or even staffing shortages.

On the other hand, a fidelity bond reimburses your client if one of your employees steals from them. This can be due to illegal money transfer by an employee, employee theft, or employee fraud.

Here's a quick breakdown of the two:

Ultimately, the choice between a surety bond and a fidelity bond depends on your specific business needs.

Bond insurance is different from other types of business insurance. It doesn’t address potential liability.

Unlike other types of insurance, bond insurance doesn’t cover potential liability, which is a key difference.

Bond insurance is more focused on addressing potential risks.