Bond Insurers

Abstract:     
Bond insurance was a small but sophisticated sector of the broader insurance industry. Conceived and created in the 1970s, bond insurance penetrated more than half of the entire US municipal bond market in the 1990s. This article explains bond insurance, its rise to prominence, and its sudden and shocking collapse. A diversifying foray of the bond insurers into structured finance risk in the years prior to 2007 is a dominant cause of these firms’ failures. Yet the larger story is the manner in which business imperatives, rating agencies, and regulators enabled and encouraged all bond insurers to pursue the same catastrophic strategy. The uniformity of strategy and capital and risk assessment created the “systemic risk” of high correlation among bond insurers.

Keywords: Bond Insurance, Bond Market, Municipal bonds, risk management, systemic risk

Accepted Paper Series