What Is a Monoline Insurance Policy?

A monoline insurance policy provides interest and principal coverage for securities and bonds when the issuer defaults. Protections against defaults are packaged in the form of credit wraps. These instruments not only provide protection for the buyer, but also bolster the credit of the issuer.

Monoline insurance policies provide credit wraps for several fixed income securities, including municipal bonds, collateralized debt obligations and mortgage backed securities. Issuers often purchase a monoline insurance policy to either enhance the credit rating of their issues or to protect the debt from being downgraded. Along with attaching credit wraps to a debt issuance, monoline insurance policies may also provide bonds that safeguard against default in transactions or contracts where physical goods are exchanged.

Monoline insurance companies typically pursue a single line of business. The majority of monoline insurance providers guarantee the repayment of corporate bonds. Monoline insurance policies provide debt service payments when the underlying issuer is not able to do so. The goal of these policies is to satisfy the expectations and accommodate the needs of investors and issuers across the capital market system. Monoline insurers attempt to fulfill this goal by mitigating risk through perpetual surveillance of their debt securities and associated issuers.