Before a municipal bond is insured and sold, it is purchased by an underwriter firm (or financial guaranty company), insured, and then resold to investors. Underwriting is a risk assessment process by the insurance company. In the underwriting process, the insurer decides whether and on what basis it will issue a policy on a bond. Most insurance companies that insure municipal bonds are called "monoline" insurers. This means the insurance company insures only debt securities, eliminating the risks that come from insuring any other types of products or services. These insurance companies are closely scrutinized by the same credit rating agencies that rate the bonds.
Once a bond is insured, its performance is closely monitored by its insurer through a process called surveillance. During surveillance, the insurer examines the financial statements and reports of the bond issuer to make sure the issuer's credit will remain stable.
After the underwriting process, which takes about a month, the bond is given a new rating by a rating agency. It is also assigned an identification number called a CUSIP. The CUSIP number is used to identify the security when it is traded and settled.
Drawbacks of Insuring Municipal Bonds >>