http://papers.ssrn.com/sol3/papers.cfm?a bstract_id=1909091

While bond insurance penetration in the muni world has dropped to very low levels, the standardization of ratings had little to do with this. Go back to 2005 and look at insurance penetration in muniland it was 70% or so. It was very common for highly Aa/AA rated issuers to buy bond insurance because there was value in obtaining the policy. The savings gained (lower borrowing costs with the insurance wrap) more than offset the premium paid for the bond insurance.

Fast forward to 2008 and 2009, the monoline bond insurers imploded due to MBS, CDOS and various other bad transactions which drove their corporate financial statements to ruin. The aftermath is one viable insurer (Assured Guaranty) who writes new business today, the penetration has dropped significantly because people don’t value the policy nearly as much and there is only one provider (Warren’s Buffett insurer hasn’t participated on any sizable scale).

Furthermore, the standardization was done by Moody’s in April 2010. Look back at insurance penetration and you will see it dropped dramatically in 2008 and 2009 as the insurer’s (MBIA, Ambac and FGIC) were downgraded from their Aaa/AAA pristine ratings to junk bond status, BB, B and CC levels.

Yes the need for insurance has been removed, but that is primarily due to the insurer’s disappeared as viable corporaions, not because of the standardization. The timing of the severe decline of insurance penetration simply doesn’t support the writer’s rationale.