Determinants of Private Sector Insurance Premiums on Municipal Debt Issues

Earl D. Benson and Barry R. Marks

Municipal Finance Journal, 2011, vol. 32, issue 3, 1 - 18

Abstract: This paper examines the pricing of municipal bond insurance—insurance generally paid for by the issuer that guarantees payment of principal and interest on newly issued bonds. In particular, it focuses on the factors that cause the premiums to vary from one municipality to another and from one bond issue to another. This study uses a unique municipal bond database that includes the insurance premium paid by issuers of municipal debt obligations in Texas. Our study focuses on the determinants of bond insurance premiums for one type of municipal bond—city general obligation bonds. The paper fi nds that municipal bond insurance premiums conform quite closely to the predictions of a theoretical model. Those factors that lead to an implied higher risk for the insured and their bond issues are associated with higher insurance premiums charged by the insurers. The paper also shows that competition among bond insurers affects bond insurance premiums.

Date: 2011
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