Insurance can make financing of B&R projects safer

By Xiong Yuan Source:Global Times Published: 2018/3/26 22:48:39

Illustration: Luo Xuan/GT

Recent research has found that only 10 percent to 20 percent of Belt and Road (B&R) initiative projects can be smoothly financed. However, if insurance is involved in the early stages, financing and work on a project itself can go faster. In this case, insurance plays a role as a capital provider, although this role is often overlooked.

It is not difficult to understand why the financing of B&R projects faces difficulties. These projects often have long cycles and relatively high country risk levels. Different projects face different degrees of economic, policy, legal and security risks that scare away capital. Long evaluation periods further complicate matters.

Having insurance during the financing stage will lead to three benefits:

First, insurance will increase a project's attractiveness to funding and make investors with capital more willing to participate.

Second, after insurance funds get involved, asset management companies or insurance institutions related to these insurance funds will design related products. For example, when companies design new types of insurance, risks like maritime transportation may be put into the contract. With such a well-defined insurance product, the specific risk has specific compensation, which will give greater confidence to investors.

Third, insurance will play an active role in encouraging private enterprises to participate in the B&R initiative and encourage domestic funds to go out. In general, private enterprises are more flexible and they are mainly pursuing returns. When the risks of a projects are uncertain, the participation of private capital will be more likely if there are collateral or new guarantee.

In general, China's domestic insurance companies will choose projects with a relatively stable yield. As a result, insurance funds themselves have become a guarantee of higher project returns and stronger stability. If insurance funds are willing to participate, it can be taken as a sign that the project may be really good and worth participating in. From this perspective, the involvement of insurance during the financing phase can actually be considered an "invisible guarantee."

It is reasonable to introduce insurance in the financing stage. However, for specific projects, we should see that insurance participation does not play a necessary role but is rather the icing on the cake.

At present, many of China's insurance companies have been involved in B&R-related projects. However, this involvement is mainly guaranteed by governments or State-owned enterprises. In other words, project returns and risks are also relatively controllable.

Projects related to the B&R that involve insurance funds are assumed to be the best ones, for not all projects will be chosen by insurers. After all, insurance funds come from policyholders, so insurers need a relatively stable cash flow to cover their basic costs.

What can be said is that if a project is reliable, it will attract insurance funds. But that doesn't always mean as long as insurers participate, a project will become more reliable.

Actually, a crucial point in deciding whether an insurance fund is willing to participate is the risk of the project itself. Not only B&R projects, but numerous overseas investments that Chinese companies have made, face the same problem. Country-specific risks, credit risks and legal risks of projects must all be repeatedly assessed. Local infrastructure conditions, cultural conditions and political stability are also important factors to be considered.

The author is a research fellow at the International Monetary Institute of Renmin University of China.


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