Infrastructure growth in Asia and insurance opportunities through three steps
It is expected that we will have to live with a challenging low interest rate environment for some time to come. This is particularly a challenge for life insurance companies. The good news seems to be that the insurance sector in Asia is expected to grow further in the next 10 years and during that period, by as early as 2020, it is reported that 40 per cent of the global insurance business will be transacted in Asia. Simultaneously, it is clear that governments and banks are finding it increasingly difficult to finance very much needed infrastructure development in these emerging and frontier markets.
Therefore, there is a great opportunity for insurance companies to play an important role in the economic growth of emerging and frontier markets through involvement in infrastructure development.
There are a multitude of options for insurers to be involved in infrastructure projects and there are dozens of types of insurance covers that are connected to such projects, for example – Construction and Erection All Risks (CEAR/CAR), Engineering Procurement Construction and Commissioning (EPCC), Delay in Start Up (DSU), Third Party Liability (TPL), Contractor’s Plant and Equipment (CPE), Workmen’s Compensation, Professional Indemnity, Employer’s Liability, Environment Impairment Liability, Business Interruption, Mechanical or Electrical Failure, and all risks to cover operational damage after construction, to name a few.
In addition, insurers can innovate by creating separate or additional consequential loss policies for each of these covers, which would normally be excluded in the main policy, including extension of covers to director’s and officer’s liability for actions or omissions during construction.
The First Step therefore is for general insurance companies to move out of their comfort zone of milking the fat cow of motor vehicle insurance (the inevitable Battle Zone) and start operating in the blue ocean by innovating/designing new covers and creating new market space, especially those that contribute to the acceleration of the economic development of emerging and frontier markets.
The Second Step is for the government monopoly over insurance cover of infrastructure projects to be removed. In many emerging/frontier markets, large infrastructure projects are reserved for state insurers and the rest of the market is locked out. In certain instances, in addition to the state monopoly, through certain clauses that are inserted into the contract documents, specific foreign insurers not registered in the country where the project is implemented, are permitted to cover the project risks, excluding locally registered insurance companies. This not only deprives the market an opportunity for inclusive growth but also increases the risk of national financial system instability with large risks being covered by such single state-owned entity guaranteed by the government instead of being reinsured, or such risks being covered by an unregulated foreign entity.
With the aforementioned growth of the insurance sector in Asia shifting from the US and Europe to Asia, it is opportune for the governments of Asian emerging and frontier markets to take the bold step in unlocking and opening up this vital sector to the entire domestic insurance market to optimise the benefits of multiple player involvement, to spread the risk and provide modern insurance covers a series of connected projects needed to accelerate infrastructure development.
The Third Step that governments of emerging and frontier markets can take in this connection is to review its insurance regulatory framework. A key area where the insurance industry can play an important role in a country’s infrastructure development is on the investment side. If the regulatory framework can provide incentives to invest in long term infrastructure debt, then long term liabilities could be matched by long term assets. And this could be achieved through reduced or risk neutral capital charges under a Risk Based Capital framework. A risk-based supervisory system will ensure that this new class of assets is properly managed in order to maintain financial stability.
There are examples in Europe in EIOPA and ELTIF: the European Insurance and Occupational Pensions Authority permits investment in Alternative Investment Vehicles such as the European Long Term Insurance Fund, and in fact encourages it. The Reserve Alternative Investment Fund of Luxembourg and the Iceland Collective Asset-management Vehicle are two other examples. In India, the Insurance Regulatory and Development Authority mandates 15 per cent of long term funds to be invested in the infrastructure development sector, and this is expected to be increased to 20 per cent.
These Alternative Investment Vehicles (AIVs) can be set up as public-private partnerships or purely private equity and could be domestic, multilateral or regional entities (visualise an AIV established by SAARC, ASEAN etc). Furthermore, organisations such as the EDHEC Infrastructure Institute of Singapore collects, cleans and analyses private infrastructure investment data over a period of fifteen to thirty years.
Conclusion
Whilst the general insurance companies have a major role in providing the required insurance cover to infrastructure projects, the life insurance companies can play their role by investing long term funds in Alternative Investment Vehicles that are set up for infrastructure development.
It is up to the insurance industry to make its case to the insurance regulator/supervisor in emerging and frontier markets and work closely with the said regulator to create a suitable regulatory framework within which the steps enumerated above can be implemented.
(The author is the CEO/Principal Consultant at Global Business Counselling (GBC), Singapore and
Sri Lanka, and the former Director General of the Insurance Board of Sri Lanka (IBSL). He can be reached at chandrig@globalbizcounselling.com)
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