Public/private partnerships offer advantages for political, credit risks

24/01/2018
Member News

Original article published, DECEMBER 19, 2017, at xlcatlin.com

Political risk and credit insurers are living in interesting times. On one hand, global risk and volatility have never seemed more prevalent. On the other, insurers that are willing to take a long-term view have a plethora of growth opportunities.

An opportunity that many insurers overlook -- and which can greatly benefit exporters, investors and financiers -- is partnerships with multilateral agencies, development finance institutions and export credit agencies. These largely government-sponsored agencies increasingly are seeking private-sector partners to support project financing and infrastructure development. What’s more, these organizations are interested in learning from commercial political risk and credit insurers that have demonstrated strong interest in partnership.

For example, Nippon Export and Investment Insurance (NEXI) is a government-owned organization that supports Japanese companies around the globe. NEXI recently embraced a medium and long-term plan to expand the risks it underwrites. As a result, it is seeking not only to emulate private-sector insurers and reinsurers but also to forge partnerships with other export credit agencies. Examples of development finance institutions and export credit agencies include the African Development Bank and Export Development Canada (EDC).

One of the factors driving this interest from multilaterals, development finance institutions and export credit agencies is governments’ growing reluctance – and, in some cases, inability – to fully fund projects. In many emerging and even developed markets, governments are stretched thin. Saddled with debt and entitlement obligations, in many markets the burden on taxpayers is high. Add in political uncertainty, and it’s no wonder that such markets see their capital flows constricting.

At the same time, these markets have strategically important infrastructure needs, and their exporters need financial support to compete and contribute to economic output. Without private-sector participation, these nations and their citizens are at risk of falling further behind.

An unfortunate example is Venezuela. Highly dependent on oil revenues, Venezuela introduced strict currency controls in 2003 and a nationalization program under the late President Hugo Chavez. Since then, falling oil prices have exacerbated an economic crisis that, in 2016, saw real GDP shrink by more than 10%, inflation surpass 700% and consumers facing widespread shortages of basic goods. The government, led by President Nicolas Maduro, has instituted price controls and assume a role as the principal buyer and distributor of imports. Both imports and exports have contracted. Trade and investment in Venezuela are dramatically reduced, infrastructure has been neglected and its people are suffering for it.

Infrastructure investment is nearly a universal need. In the United States, infrastructure demands are very large, both to accommodate rapidly growing population centers and replace aging assets. There are ambitious plans in Washington, D.C., to deploy $1 trillion in capital to improve U.S. infrastructure over the next 10 years.

China has an ambitious vision of an infrastructure project across Asia and into the Western Hemisphere called “One Belt, One Road,” which calls for an estimated investment of $10 trillion. A key element of China’s project is a new multilateral to attract funding, the Asian Infrastructure Investment Bank. Colombia and other Latin American nations are welcoming investment in infrastructure, including rail and road projects. Africa and the Middle East have similar investment needs.

These sorts of projects offer tremendous opportunities for public/private partnerships. To reap these benefits, private-sector insurers must have:

  • Long-term commitment. Infrastructure development is not a short-term venture. These projects can take many years to complete, often through multi-year phases. Many private credit insurers have tended to focus on shorter-term risks because those are easier to exit or reprice. However, a rising number of commercial political risk and credit underwriters recognize the value in supporting long-term ventures by establishing key relationships with government-sponsored providers.

  • Expertise. Long-term political risks and credit risks are challenging. Private companies that have expertise in analyzing these risks have an intrinsic advantage.

Short-term thinking when it comes to credit risks does not necessarily translate into better business results. For example, the 82 public and private members of members of the Berne Union have reported rising claims in short-term export credit insurance for five straight years, from 2012 through 2016, when they paid out nearly $2.8 billion. Similarly, the loss ratio on short-term business has steadily increased over that period, exceeding 80% in 2016. Adding in expenses, there is little room left to achieve profit.

An analogy is an individual investor’s experience over time in the stock market. In the short term, the investor is exposed to greater volatility and risk of loss. A longer horizon, with a solid understanding of the market’s dynamics and investments calibrated to the investor’s risk tolerance, historically provide the best returns. Political risk and credit insurance operate in a similar way. More profitable opportunities exist in partnerships with multilaterals, development finance institutions and export credit agencies, especially when projects have strategic importance. These largely government-sponsored institutions often see higher-quality business sooner than their private counterparts, and they possess significant clout when project difficulties emerge.

The marketplace needs risk-takers. Political risk and credit insurers provide crucial support for global development and trade. Long-term support of risk-takers, through partnerships with government agencies, can make a world of difference.

Latest News

Member News
06/05/2021

EXIM Thailand Appoints New President

EXIM Thailand would like to announce the appointment of Dr. Rak Vorrakitpokatorn as President, effec...
Publications
27/04/2021

April BUlletin: A cross-roads for Africa's post-COVID recovery?

Which approaches can best build upon the opportunities presented by growing intra-regional trade, an...
Member News
15/04/2021

Signe Rähesoo appointed CEO of AS KredEx Krediidikindlustus

The Supervisory Board of AS KredEx Krediidikindlustus has appointed Signe Rähesoo, who has long-term...
Publications
23/03/2021

March BUlletin: Navigating the brave new world of trade

How can we maintain supply of finance, in the face of growing demand and irregular patterns of risk?
Secretariat Update
17/03/2021

Didem Bayseferogullari joins the Berne Union as Committee Manager responsible for the ECA Committee

Didem joined the Berne Union Secretariat in March 2021 with the primary responsibility for managing ...
Publications
25/02/2021

Business Confidence Index Q1.21 Published

A new quarterly report tracking perceived demand, risk appetite, and claims in the export credit ins...
Press Release
25/02/2021

Insurers are carefully balancing their risk appetite against a backdrop of uncertainty, increasing demand and anticipated rise in claims

Results from the Q1 2021 Berne Union Business Confidence Survey indicate that demand for export cred...
Member News
05/02/2021

James C. Cruse Authorized as Acting EXIM First Vice President and Vice Chairman

EXIM Senior Vice President of Policy Analysis and International Relations James C. Cruse Authorized ...
Publications
02/02/2021

How credit insurance supports the real economy

The Berne Union has published an informational report illustrating the purpose, function and effecti...
Publications
27/11/2020

Berne Union 2020 Yearbook Published

We mark the year of ‘COVID’ and coalescence of mega trends in trade, risk, sustainability, public po...
Outreach
12/11/2020

What does the post-COVID landscape for finance of trade and economic development look like?

The Berne Union's Capacity Sharing Marketplace brings together ECAs, DFIs, MDBs and private sector f...

Upcoming meetings

ECA Climate Strategies & Policies

20 May 2021
Discussion for members of the Berne Union's ECA Committee on approaches to climate

Risk Underwriting during the Pandemic

26-27 May 2021
Discussion for members of the Berne Union's ECA Committee on approaches to risk underwriting during the COVID-...

Capacity Sharing Marketplace: Cooperation for climate impact

07-10 Jun 2021
Online
Practical workshop exploring how public and private sources of international finance can cooperate to tackle g...

Project Finance Webinar

24 Jun 2021
Online
An online webinar exploring current trends in project finance activity: deal flow, appetite, risk, restructuri...

Annual General Meeting Budapest 2021

11-15 Oct 2021
Budapest, Hungary
The 2021 AGM is currently planned to take place in person from 11-15 October, in Budapest Hungary