Residual value insurance
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A residual value insurance policy is designed to underwrite valuations of assets at the date of termination of a lease or other type of financing arrangement. Potential beneficiaries of such policies are predominantly providers of asset finance or manufacturers. However business owners and shareholders can also be seen to be potential beneficiaries as shareholder value can be protected or enhanced if balance sheet asset values are protected in this way.
The policy itself could perhaps be better described as a financial hedging instrument rather than a typical insurance policy and its primary purpose is to support asset financing transactions.
It only exists to guarantee the difference between an anticipated residual value and an actual residual value and thus removes asset risk from the equation as far as funding institutions are concerned.
A variety of assets can be insured in this manner including commercial property. Because the existence of such a policy means that lending risk is reduced it may assist in obtaining improved credit terms as well as offering a degree of protection for any lease balloon payments which may be included as part of the overall finance transaction.
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