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What is Financial Guarantee Insurance?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2016
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    2003-2016
    Conjecture Corporation
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Financial guarantee insurance is a type of insurance coverage that helps to minimize losses sustained as the result of any financial transactions that are covered in the terms and conditions of the policy. Insurance of this type is often utilized as a means of attracting potential investors, since the coverage greatly increases the chances of recovering their full investment in the event of a default on the security. Many financial guarantee insurance contracts also provide some coverage that allows investors to realize part or even all of the interest or dividends they would have received if the security had not gone into default.

It is not unusual for any entity that offers asset-backed securities for sale to secure financial guarantee insurance. Aside from the protection afforded by the insurance policy itself, the presence of the coverage serves the practical purpose of increasing the credit rating of the securities, a factor that is likely to result in greater interest from potential investors. Since the degree of risk is lessened significantly when this type of insurance is provided, investors who might otherwise hesitate to consider the options may choose to participate.

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Many different types of entities routinely make use of financial guarantee insurance. Investment bankers often provide this type of coverage for any asset-backed securities they sell. Issuers of municipal bond are also highly likely to provide this type of security for investors. There are also financial guarantee insurance contracts that are available for other investments as well, with the availability based on regulations that apply in the locations where the insurance provider is registered by the local jurisdiction.

As with most types of insurance, the causes of the loss determine whether or not a claim filed by the policyholder will in fact be honored. Most financial guarantee insurance plans focused on investment opportunities will include a range of covered events in the provisions of the insurance contract. Should the events that lead to the failure of the investment not be addressed in the terms of the policy, then the claim will be denied. While this type of event rarely takes place, investors should take the time to acquaint themselves with the terms of the coverage offered by the issuer. Care should be taken to compare those provisions to the anticipated movement of the economy in general, and determine if there is any significant possibility of an uncovered event taking place and causing the investment to fail.

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