BRI offers $11bn in new premium for foreign insurers by 2030 but pricing remains big problem

The Chinese-led Belt and Road Initiative (BRI) will have an estimated economic impact of $21trn, including $8trn of infrastructure investment. Insurance premium potential from projects up till 2030 could reach $27bn and foreign insurers could capture some $11bn of that, according to experts. But the capacity and appetite of the domestic insurance market in China remains a big obstacle for the international market, as domestic pricing for infrastructure projects in China falls well short of international pricing standards. Matthew Hooker, regional head of engineering Asia-Pacific at Allianz Global Corporate & Specialty (AGCS), recently gave a speech at the inaugural Insurance Summit on BRI, organised by Asia Insurance Review in Singapore. Mr Hooker argued that international insurers such as AGCS can generate significant business from the BRI if they use their risk management engineering skills to differentiate themselves and support the local market. Commercial Risk Asia’s Adrian Ladbury asked Mr Hooker to explain the opportunities and challenges that face the international insurance market as they seek to become increasingly involved in this massive undertaking. Adrian Ladbury (AL): What exactly is the BRI and how big is it in financial terms? Matthew Hooker (MH): The BRI is a large-scale intraregional initiative by China that aims to create an unbroken transport and infrastructure network across both land and sea. The ‘Belt’ refers to the Silk Road Economic Belt, a land route covering central and western China, central-western Asia, Russia, the Middle East, and Europe; while the ‘Road’ refers to the 21st Century Maritime Silk Road, an ocean route connecting Chinese coastal cities with southeast Asia, Africa and Europe. If successful, ‘One Belt One Road’ will represent the world’s largest example of regional economic cooperation. It is estimated to have an economic impact of $21trn, including $8trn of infrastructure investment (such as ports, airports, railroads, power, energy, highways and bridges). It will cover two thirds of the world’s population and one third of global GDP. The insurance premium potential from BRI infrastructure construction projects is estimated by industry experts to amount to $7bn, of which $1.5bn could go to foreign insurers. Insurance premium potential from projects that may be forthcoming in the years to 2030 is estimated to be $27bn, of which $11bn could be for foreign insurers. The Yiwu-London freight train service between China and the UK is an example of a project under the BRI that enables and facilitates trade between multiple countries. The train made its maiden journey in January 2017 and takes only three weeks to reach London from China’s Yiwu City in the Zhejiang Province, which is half the time needed for the equivalent journey by sea, and costs significantly less than air freight. The service crosses seven countries (Kazakhstan, Russia, Belarus, Poland, Germany, Belgium, and France) before reaching the Barking rail terminal in east London and transports a variety of goods, including pharmaceuticals, vitamins and soft drinks. AL: What are the main risk management challenges involved with the BRI and how can an international insurer such as AGCS help those involved? MH: Some main risk management issues involved with BRI are those traditionally associated with large construction and infrastructure projects, which have been estimated to account for slightly under one third of investment in the BRI. Chinese companies expanding their operations overseas as a result of BRI must also deal with the risks associated with working within an unfamiliar and foreign regulatory landscape. These companies will benefit from international insurance solutions. AGCS, for example offers this through its Allianz Multinational Product, allowing clients to leverage the company’s global network across 210 countries, including the ones involved in BRI. AL: How can international insurers add value and work with the local insurance market to support these projects? MH: As a global insurer, AGCS is able to bring its wide experience of structured project finance to Chinese clients and offer wider insurance products than what is currently on offer in the Chinese market. Our experience and expertise in insuring large corporate and specialty risks allows us to add value to the Chinese insurance market with innovative solutions and risk insights from our global experts. On a wider group basis, we are also able to support clients with bonding via our Euler Hermes trade credit business. AL: Who are the main parties involved in this massive BRI plan that international insurers could help and, more specifically, in what way? MH: The BRI covers a variety of industry sectors, in which many of China’s leading state-owned enterprises and construction companies already are, or will be, involved, especially where their domestic experience supports the successful completion of the projects. Apart from just construction proficiency, China is also keen to export innovation and technical standards, both of which are key drivers of the BRI. Development opportunities in sectors such as telecommunications, high-speed rail and renewable energy will likely receive strong central support as these investments execute on the overall vision of the BRI and also China’s longer-term aim of transforming the country into an advanced manufacturing leader. AGCS’s value to Chinese developers is in our global risk and insurance expertise, which allows us to offer innovative risk transfer supported by risk management expertise. Our network of global offices has specific knowledge of local regulations and particular geographical exposures, which can contribute to the wider risk assessment of projects and benefit the overall delivery. AL: How is this huge project being risk managed and insured – centrally, or is it managed at a local level? MH: The BRI should be looked upon as a vision, and not a project with defined budgets, specifications, programmes or even fixed outcomes. Many BRI projects are developed in isolation from one another with multiple developers, independent financing and contractual structures. China looks to benefit both domestically and internationally from BRI as it seeks to secure a leading political and economic position in the world. These projects will collectively contribute to the overall objectives, as well as China’s ambitions to improve its connectivity within the region and the world, as well as offer more diverse trading routes. AL: Is AGCS already insuring elements of this risk and if so which? How could AGCS’s capacity and expertise be used in other areas? What is the size of the actual and potential total sum insured? MH: AGCS is a market leader in BRI projects. In continuing to develop solutions for our Chinese clients, our focus is on delivering a holistic risk and insurance approach to projects, offering the full benefits of one of the world’s largest insurance companies. BRI projects are extremely diverse and demand a variety of insurance solutions, ranging from insurance-backed surety bonds to management of weather-dependent revenue streams for wind and solar projects. We look to enhance the business of our clients and support the successful delivery of their projects with our knowledge and history in engineering-based risk and insurance products. Estimates on the value of BRI projects can vary dramatically. From a property and casualty (P&C) perspective, we see the potential for international markets to increasingly participate, with potential markets earnings for Allianz in the order of $500–$600m during the next decade. AL: What are the legal, regulatory and practical barriers for international insurers such as AGCS to become involved with such a project in this region? MH: The biggest challenge to international insurers is the capacity and appetite of the domestic insurance market in China. There are more than 85 registered P&C insurers in China, with an estimated capacity of €3bn. In general, domestic pricing for infrastructure projects in China falls short of the equivalent international pricing. With domestic Chinese insurers aggressively pursuing BRI opportunities, this creates an oversupply of capacity for pure construction and property risks that, in turn, makes it difficult for international insurers to compete solely on the basis of pricing. AGCS seeks to differentiate its offering with its technical expertise and experience, rather than simply add capacity to an already saturated market.

BRI offers $11bn in new premium for foreign insurers by 2030 but pricing remains big problem

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