Bond insurance is an insurance policy issued by a company that can be purchased to guarantee repayment of a debt and any interest payments that may accrue in event of a default. It is thought of as a credit enhancement because it allows the insured to be rated higher than it would have been without the financial insurance.
Who is it for?
This type of financial insurance is used by bond issuers to improve their credit rating. Once the insurance is purchased by the insured, the insured’s credit rating is replaced by the insurer’s. The insurance reduces the amount of interest a borrower would have to pay without the insurance, and allows small businesses and professionals to use the stronger credit rating.
How it works?
For the insurance, the insurer is paid a premium. The premium can be paid as a lump sum or installment payments. The premium is based on the measure of risk the insurance company is taking. There are several factors that impact the premium amount including the size of the company, amount of years in business, and the company’s reputation.
Different Types of Coverage in Existence
There are two types of insurance in this category; fidelity and surety. Each type of insurance offers different protection.
Surety bonds are designed to guarantee a businesses’ integrity, responsibility, and performance. It’s a financial agreement that helps to ensure a company will follow through with the contract and all laws effecting the contract. Fidelity bonds offer protection against employee misconduct such as embezzlement.
There are many benefits of having bond insurance. A bonded business can take risks that other businesses may not be able to afford. The leverage allows the business to grow and feel safe while doing so. Two of the most common industries where this insurance is popular includes the construction and financial market.