The Belt and Road’s major infrastructure and energy projects stand to benefit from the support of risk and insurance partners during the lifecycle of a project, explains Brian Botkin, global head of multinational, global financial lines, AIG.
China’s Belt and Road Initiative (BRI) continues to attract international attention and grab headlines. Determining exact figures for the vast macroeconomic initiative is challenging, given its scope and wide definition of what constitutes a BRI project. Current estimates range from about $1trn of outward investment up to $8trn, sustained over several years, generating up to $28bn of insurance premium in the years to 2030 for projects outside of China, according to Swiss Re.
The Chinese government has pledged $150bn a year to develop ports, roads, railways and airports, as well as power plants and telecommunications networks along the overland ‘Economic Belt’ and maritime ‘Silk Road’. More than 70 corridor countries have a stake in the project, which will be multilaterally funded by the private sector and international financial institutions, such as the Asian Infrastructure Investment Bank and China Development Bank.
Internationally, there is significant interest in and scrutiny of how BRI-related projects are being undertaken, with the initiative attracting both criticism and support. In an examination of the BRI to date, the Asia Society Policy Institute (ASPI) has analysed impacts in five main areas: financial sustainability, transparency, labour practices, stakeholder engagement and environmental protections.
In a report submitted to the Chinese government ahead of the second Belt & Road Forum in Beijing in April 2019, the institute puts forward 12 recommended best practices, which it argues will generate better outcomes. As outlined in Navigating the Belt and Road Initiative, which was supported by AIG and Ford Foundation, ASPI argues that the “scale and scope of the BRI is such that even modest improvements in its procedures and standards could provide significant benefits to project host countries”.
Among the recommendations is the importance of conducting a comprehensive and transparent project preparation process, and for project developers to use the applicable International Federation of Consulting Engineers (FIDIC) standardised contracts. “The use of FIDIC contracts would align Chinese construction companies and infrastructure developers with international norms and best practices,” states ASPI. “Such contracts would facilitate structuring BRI projects on a PPP basis [and] promote the internationalisation of the BRI.”
A holistic approach to insurance
The BRI consists of hundreds, if not thousands, of major projects designed to stimulate economic growth and improve China’s trading links across Asia, Africa and central Europe, even reaching to Latin America and the Caribbean. The initiative is colossal in both its scale and ambition. It includes the 142km Jakarta-Bandung high speed railway, currently under construction; the $1.4bn Colombo Port City in Sri Lanka; the $1.55bn Padma Bridge in Bangladesh; and the Djibouti International Free Trade Zone.
While there is much debate around how to define a BRI project, it is clear the initiative is part of the ongoing globalisation of the construction industry. As Chinese companies are expanding their footprint in BRI countries, so too are contractors from other countries in Asia-Pacific and beyond.
Each stage of a megaproject has differing risk management and insurance needs, from professional indemnity cover for architects, engineers and site surveyors at the design stage, through to construction all risks (CAR) during the building and construction, and property and casualty insurance products for the operational stage. Other specialist products that may be purchased typically include environmental impairment liability (EIL) and cyber.
From an insurance and risk perspective, there is a significant opportunity to take a more holistic view of the risk management and insurance requirements of BRI megaprojects. Rather than treating each stage as a separate silo, support from insurance carriers is needed throughout the lifecycle of a project, taking it from design stage through to build and operation.
This was a key theme at the Belt & Road 2.0: AIG Multinational 2019 conference in Vienna in October. The role of multinational insurance companies at all stages of development was highlighted, with recognition of the need to have insurance products that work both locally and as part of a multinational programme.
In China, for instance, building and engineering firms expect their insurance documents to look and read a certain way. At the same time, companies operating across borders, such as international law firms, accountants and architects, also need cover that works as part of their multinational insurance programmes.
It is important to have strong capacity sitting behind these insurance products to handle the magnitude of potential claims that may occur. Many of the BRI projects that are underway or in the pipeline are in regions prone to natural hazards, with exposure to losses from earthquakes, windstorms and floods. In addition, many projects are also in countries affected by instability and conflict, which also presents political risk and people risk exposures.
The right insurance and broking partners can ensure the appropriate risk transfer solutions are available for the lifecycle of BRI ventures. There are obvious benefits associated with partnering with insurance carriers and brokers with a track record and technical expertise of working on large infrastructure projects, as well as global networks and strong connections in Chinese risk and insurance.
Under FIDIC, demand has increased for single-project professional indemnity (PI), as it requires service providers to maintain and procure PI cover for a certain number of years following the completion of a project, depending on specific contract requirements. Interest is also growing in integrated solutions that bring together CAR, third-party liability and other specialist project-related covers, including EIL, cyber, and kidnap and ransom.
As the BRI continues to evolve, AIG anticipates growing demand for multinational and integrated product solutions, including single-project PI. From the perspective of international clients, there is a recognition of the benefits of an integrated approach to risk transfer, with compliance across all regions in which a business operates, with local on-the-ground intelligence and drop-down admitted policies where needed.
As my colleague Tony McHarg, head of multinational for Asia-Pacific at AIG, explains: “We work with our clients to get ahead of the investments and risks to provide structured risk mitigation and risk financing that meets the needs of Chinese investors and clients. Our network capability addresses solutions for all insurance demands – combining both global and local insurers. It is a framework that includes dedicated multinational insurance expertise, local claims presence, and reinsurance and fronting specialists for moving money across borders, as well as managing tax, risk and compliance challenges.”
Contributed by Brian Botkin, global head of multinational, global financial lines, AIG