With the help of bond insurance service, the bond issuers are able to pay insurance premium to a third person or party. The third party or person will grant fund repayments and benefits of interests as per the bond in case of the issuer fail to act or make the same.
The outcome of this is to elevate the bond insurance ranking to the ranking of the insurer; consequently, the credit rating of the bond insurer should be nearly ideal. The premium asked for bond insurance is a calculation of the professed hazard of the issuer failure.
In most of the cases the Government bonds are not insured; insurance called municipal bond insurance was initiated in 1971 in the US. More than 40% municipal bonds by 2002 were insured, often by a process which involves a disbursement of a particular premium at the acquisition of bond.
The main bond insurers in the US are FGIC, XL Capital, Ambac, MBIA Insurance Corporation. Those companies who are just in the business of bond insurance are called monoline insurers. Ambac Finance Group is the first monocline insurer which was founded in 1971. The next one was MBIA which was founded in 1973. Taxable depositors gain from the exclusion of interest of municipal bond as of income tax of federal.
There are some cases when State and local taxes also free some local bonds. Taxable depositors face a strong inducement to buy local bonds. Till 1989, multiline insurance groups were allowed to give assurance for municipal as well as added bonds, include their other insurance businesses like life insurance and property insurance.
It was in 1989 when New York State passed the article 69 in which the multiline insurance group and companies are not allowed to enter in financial security business. On point to notice that none of the monoline insurer was ever evaded before 2007.