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If the G20 estimates are correct, the funding needed annually to plug the investment gap in infrastructure projects in developing countries is $1.5 trillion. With most of this needing to come from the private sector, the Insurance Development Forum event at the Bank of England in February was timely – launching an initiative to encourage insurance investment in crucial projects to build resilience in the developing world.
The challenges of creating resilience
It was an insightful event, not least because it framed how important these projects are in helping countries become more resilient at a time when natural disasters are occurring at an increasing rate and disproportionately affecting the poorest communities. Of course, building resilience is a multidimensional process, requiring interventions across a wide range of different mechanisms. However, the investment of private capital into infrastructure projects can stimulate economic growth which is vital in supporting sustainable industrialisation, encouraging innovation and enabling these countries to independently recover from shock events with a reduced need for foreign aid.
Finding private support for these important undertakings is tough. Insurance investors have not traditionally been keen to invest because they have fiduciary responsibilities and are subject to regulatory requirements; the thresholds of which are often not met by projects of this type. Organisations like the IDF are trying to change this by working with regulators to re-calibrate some of these requirements, as well as working with the multilateral development banks (MDBs) to try and make these investment opportunities more attractive for insurance investors. But even with this kind of intervention there are other factors that affect investment decision making.
Mitigating the risks
While infrastructure projects in developing economies are exposed to macroeconomic risks such as fluctuations in the exchange rate and interest rates, the biggest single cause of default of unrated loans from developing countries is from political risk (43%*) compared to only 1% in advanced economies.
Here the London Market has a wealth of expertise to help mitigate that risk, with brokers and underwriters with a depth of expertise in and an appetite for political risk. This expertise is combined with innovation and creativity; genuine global reach; robust regulation and oversight and the ability to pay valid claims. It should therefore be possible to harness these capabilities and expand the role of the London Market in protecting society and underpinning economic development in these developing countries.
There could also be opportunities to use the UK’s ILS framework to support these projects. Securitising infrastructure loans so banks can free up additional cashflow for new infrastructure projects is another way to bridge the huge $1.5 trillion gap.
Infrastructure projects are vital to the continued evolution of developing countries. As risk managers, risk carriers and investors, the insurance industry has a vital interest and plays an important role in fostering sustainable economic and social development. The conversation about insurance needs to move away from simple indemnification. With such a huge investment deficit we need to get creative and there is no better place than London to rise to the challenge.
*Jobst and Moody’s investment Services for the period 1995 -2016
