A Residual Value Insurance indemnifies an insured against a loss that might occur if the sale proceeds of a properly maintained asset are less than the asset's insured residual value at a specific point in time.
Residual Value Insurance is a creative, flexible tool that can be used to relieve not only asset risk but also the accounting or regulatory contrains associated with unguaranteed residual value and balloon note financing in asset-based financing transactions. Because residual value insurance can be specifically tailored to meet clients' numerous and diverse objectives, only its most common utilization's have been featured in the following pages to serve as a basis for further discussion.

Traditional lenders have a reluctance to assume asset risk. Forecasting the economic and market factors that might adversely affect the future value of an asset is extremely difficult for non-specialists. Consequently, in many structured lease transactions, asset risk, or the residual value exposure, needs to be covered before financing can go forwards. In such cases, residual value insurance, becomes the essential component. The dollar value of the insurance may equal only 20% or 30% of a lease transaction, but is the keystone percentage that supports the full collateralization of the asset.

A residual value insurer lends its balance sheet to a financing transaction as a third-party guarantor. Because this guarantee insures against the uncertainty of residual value exposure, asset risk is covered, and a fully secured receivable is created. The quality is the transaction is enhanced as its credit basis and has been improved by wrapping the asset risk with residual value insurance.
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