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Money market insurance on the way

Money management firms can expect to hear more about money market fund insurance in the coming weeks.

The Zurich-American Insurance Group last week planned to send direct mail advertisements to money market fund managers, compliance officials and other fund executives as part of its launch of Money Market Net Asset Value Protection Policy, an insurance product designed to cover money market funds from losses due to defaults. And in the next several weeks, an ICI Mutual Insurance Company affiliate expects to launch its own money market default insurance product.

Although a handful of money market funds now have insurance, officials said they believe this is the first time coverage will be widely available. For the insurers, the new product could yield premiums from the $1 trillion-plus money market fund industry of as much as $50 million a year. For money market fund advisers, the insurance will save them from having to use their own money to bail out a fund whose net asset value (NAV) dropped below $1 because of a default.

The insurance program "gives investors peace of mind," says Eric Rush, an assistant vice president at Zurich-American Specialties.

Money market funds invest in fixed-income securities in an effort to maintain a stable $1 NAV while providing investors with yield on their investments. On occasion, issuers default on payments, jeopardizing the $1 NAV. The mutual fund industry has long argued that maintaining the $1 NAV is vital to the industry's reputation of reliability.

In several instances, money fund advisers have bought the securities from their money market funds so that the NAV would not drop below $1. Money market insurance would guard against that risk. Coverage will be available up to $100 million, with added coverage available in some cases.

Money market insurance provides more psychological than fool-proof protection, said David Silver, president of ICI Mutual. Silver said the firm probably will launch its own product soon. Zurich-American officials said they now provide money market insurance to the Vanguard Group and a second client the firm would not identify. Last week the company began a to sell the product throughout the industry. Putnam Investments also carries money market insurance. Fidelity Investments has received SEC approval to institute its own insurance program.

"We believe this product will become a standard coverage for the mutual fund industry within the next two years," Rob Fishman, executive vice president of Zurich-American Specialties said in a statement.

Although estimates vary depending on the type of money fund involved, officials projected the cost of the coverage would run from one percent to 1.5 percent of assets under management.