I do not really see how cutting rates will help bond insurers.
In any case, if one insurer loses its AAA rating, municipalities can just use another one, such as Warren Buffet’s startup.
Those that lose their AAA ratings may still be able to pay claims, but can’t write new business. If a bond issuer failed, they would only be liable for the interest until the maturity date of the bond.
There was a good WSJ on this last week.
If I recall, the bond insurance market is not very regulated at all, and was likened to a bunch of people making side bets on fights.
The current worry is that some of the folks writing policies on bonds issued by the companies don’t have the assets to cover the bets. If a large number of companies go under, the value of the assets used to underwrite the bond insurance goes down as well, calling into question whether they can pay.
On top of that, as companies ratings go down, the policies themselves go up in value, and are TRADED. The tighter a company’s circling the drain, the higher the value of the bond insurance policy on a company. The holder of the bond can sell it to somebody else.
Insider trading? Why not? You can hold a bond, or an option on a bond, and no stock, and profit on either the health or death of a company.
Anyway, its complex, and not a lot is known about it, and there are trillions of dollars involved.