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October 28, 2018

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Facilitating development of the Belt and Road Initiative

THE Belt and Road Initiative (BRI) is one of the most significant developments in modern times. Belt and Road (B&R) projects have the potential to touch more than 65 countries with a combined population of 4.5 billion people, accounting for 60 percent of the world’s total population and one third of global GDP. China has and will continue to play a leading role in B&R development, yet attracting additional sources of international capital will help realize the full breadth of the BRI.

As mainland China’s financial center, Shanghai is uniquely positioned to play an important role in attracting additional funding from international sources. This can be done by encouraging the further use of (re)insurance solutions, risk
management and resilient design across B&R projects — to reduce barriers facing international investment — and utilizing partnerships to provide additional capital and expertise.

B&R projects offer numerous development and investment opportunities, but they also present risks given their complexity, scale and geographic reach. Multinational insurers bring valuable expertise in mitigating these kinds of risks through their international best-practices for assessment of risk and incorporation of resilient design, access to international capacity for (re)insurance services, and the ability to both insure and invest in large-scale projects similar to those at the heart of the BRI. The risk mitigation framework that multinational insurers can provide is critical to fostering further international investment into B&R
projects, and more broadly ensures greater resilience and recovery from natural disasters in economies along the BRI.

There are a number of steps Shanghai could take to continue positioning itself as a leading (re)insurance center for the B&R participating countries. An Infrastructure Office could be created to connect multinational insurers with B&R developers, project managers and investors. The Infrastructure Office could be part of the Shanghai Insurance Exchange and could also work closely with the International Development Cooperation Agency (set up by the National People’s Congress). Through this office, Shanghai could work with the leading multinational insurers with whom it has long-term relationships to encourage B&R project partners to establish a standardized (re)insurance program for projects. This could include a more robust use of (re)insurance solutions and the incorporation of insurers’ risk expertise throughout the design, construction and operation phases. This would allow multinational (re)insurers to help address project risks through their extensive experience in infrastructure development, expertise in writing a variety of insurance lines, diversification and financial strength, and the ability to place risk in international insurance and reinsurance markets.

Shanghai could also continue to evolve its regulatory environment for insurers. This could build on recent initiatives to open up China’s insurance sector by removing capital flow restrictions and implementing tax and legislative incentives, which will also help attract top insurance talent to Shanghai. These kinds of changes would increase the attractiveness of Shanghai as a base for multinational reinsurers in the region, which would lead to further benefits around resilience and resolution for B&R projects. Furthermore, Shanghai could bring together other B&R countries to exchange ideas regarding the regulatory and policy frameworks that would create an environment conducive to multinational insurance products and solutions, and insurance investment in infrastructure along the BRI. The key here for success is to ensure a consistent and non-protectionist environment for (re)insurers across these countries, and Shanghai can set an important example for the rest of the B&R countries.

The size and complexity of many B&R projects, particularly infrastructure projects in developing economies, means that they will require both government and private support. The capacity and structure of the Public-Private Partnership (P3) model is uniquely positioned to bring together both public and private entities and support the financing and development of these projects.

Since the contractor and the operator of a P3 infrastructure project may be the same entity, there can be blurred lines between where construction coverage ends and operational insurance begins. This could be addressed through an end-to-end policy that can help cover the full spectrum of risks, from the launch of a P3 project through to its conclusion. This would help P3 partners to alleviate investors’ concerns, receive faster claims payments, and keep projects moving on track.

Shanghai could consider drawing from its relationships with multinational companies to advise B&R participating countries on how best to structure P3s to support development while simultaneously attracting foreign investment. This could include using the “availability payments” model for infrastructure projects, where the public partner issues periodic and pre-determined payments to the private investor if the project in question meets certain requirements, while the public partner receives any revenues from the project. This helps reduce the operational risk that can be a barrier to investment for private partners.

Recommendations

Shanghai has the existing market infrastructure, access to international capital and relationships with multinational companies to help attract additional investment and development expertise to the BRI. To help further support the financial opening of the BRI, Shanghai could consider:

1. Creating an Infrastructure Office as part of the Shanghai Insurance Exchange

This would further connect multinational insurers with B&R project partners and increase the potential for collaboration on project design and development.

2. Encouraging B&R project partners to establish a standardized (re)insurance program for B&R projects through the more robust use of (re)insurance solutions and resilient design

This could outline how (re)insurance solutions and resilient design could be incorporated in each phase of projects to help mitigate risks that might prevent international investment.

3. Continuing to evolve the regulatory environment for insurers

China has already taken important steps to open its insurance markets. Removing capital flow restrictions and implementing tax and legislative incentives would continue this process, while also helping attract top insurance talent.

4. Convening other B&R countries, and working with international standard setting bodies, to discuss and exchange ideas regarding the regulatory and policy frameworks that would create an environment conducive to multinational insurance products and solutions, and insurance investment in infrastructure

This could include supporting the use of cross-border reinsurance and regulatory frameworks that support insurance investment in infrastructure in countries along the BRI.

5. Encouraging the further use of P3 between B&R countries and multinational partners and investors with whom Shanghai has relationships

These kinds of partnerships are uniquely structured for collaboration on infrastructure projects of the scale required across the BRI, and they can provide project partners with both capital and expertise.

 

As a founding member of IBLAC, AIG is honored to continue to be actively involved in its important work, particularly as the Council celebrates its 30th anniversary this year.




 

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