While most people don’t usually think about bond insurance it plays a larger role in the economy than many realize.  Whenever a community or company needs to raise money, the normal action would be to float a bond sale.  Now some of these entities may not have the best of financial ratings.  This is where bond insurance comes in. 

A bond insurer will for a fee, guarantee principal and all scheduled payments so that investors are protected no matter the financial status of the bond seller.  So in order to get the lowest interest rates possible, municipalities and companies will purchase bond insurance and thus the rating of the insurer gets transferred to the seller of the bonds. 

However, with the recent financial crisis the economy is undergoing, bond insurers are feeling the heat.  Several firms are in danger of losing their precious “AAA” or investment grade status.  Without it they pretty much lose any chance at acquiring new business.  Also any bonds that they are currently insuring would also be downgraded, which would cripple their resale value in the secondary markets.

This is more bad news for an economy already feeling the pinch from the credit crunch.  Companies and local governments would have higher costs for raising capital in the future and investors that are already weary would become even more risk averse.

There is some good news for the industry, although those above mentioned firms may not feel that way.  On Friday Warren Buffet announced that his investment company Berkshire Hathaway was entering the bond insurance market.

His new company is expected to start off with “AAA” status and won’t have the specter of mortgage backed debt to worry about.  Many analysts agree that he could become a major player in this market.  What may be most important though is the instant credibility he provides and the positive effects it will have for credit market.

On Wednesday, President Bush signed into law a bill that would extend the Terrorism Risk Insurance Act for another seven years.  The House and Senate had been debating for months over conflicting bills before reaching a compromise last week.

With terrorism being such a difficult event to insure for, it as is the case with flood insurance is backed by government programs.  Many industry insiders were concerned that an extension wouldn’t be passed in time as the old  program was set to expire at the end of this year.

While for the most part similar to the old program it will replace, there are a few key differences.  The distinction between foreign and domestic terrorism has been removed.  It also orders study to address the issue of coverage for nuclear, biological, chemical or radiological (NBCR) events.

While most property and casualty insurers don’t cover acts of terrorism at this point, it is hoped that this program will foster the growth of a private market in a few years.  The program effectively limits the potential losses an insurer would face in the event of an act of terrorism and helps share some of the financial burdens.

Florida Gov. Charlie Crist has asked lawyers to review documents as precursor to a possible class action lawsuit against some property insurers in the state.

“I’m very frustrated, as I know the people of Florida are,” Crist said Wednesday in Miami. “Some companies have done the right thing and I think followed the new law that the legislature passed. But some companies, I’m very close to being completely convinced that they’re just violating the law.”

Crist was very critical of some insurance companies which had filed for rate increases with the state’s insurance regulators.  Insurance companies were expected to pass on savings to consumers after the state’s legislature expanded it’s Hurricane Catastrophe Fund by $12 Billion.

It’s not known as of yet what monetary value a possible lawsuit might seek.  However, insurance companies using the fund would have saved millions in expensive reinsurance purchased from private markets.