Developing Insurance Markets Insurance companies and infrastructure investments June 2021 Tetsutaro Shindo and Fiona Stewart 1 Insurance is an important part of the financial sector, supporting broad economic and general well-being in developed economies in a way that is so entrenched and accepted that it is not always widely recognized. This report aims to examine experiences to date with infrastructure investments by insurance companies. Case studies and lessons (mostly from Asian and OECD economies) are presented to see how these could be replicated in other countries. This report has been prepared by Tetsutaro Shindo (Financial Sector Specialist) under the guidance of Fiona Stewart (Lead Financial Sector Specialist) in the Finance, Competitiveness, and Innovation (FCI) Global Practice at the World Bank. The authors are grateful for guidance and comments particularly from Richard Mark Davis, Samantha Cook, Brinda Devi Dabysing and Swee Ee Ang as peer reviewers at the World Bank. The authors are also thankful to Euan Marshall and Enrique Tizon at the IFC and Tomas Walter and Ornella Caruso at the EIOPA for their useful input in addition to other colleagues and stakeholders who were involved in the discussions and in support of the work. This material has been funded by the UK aid from the UK government, however the views expressed do not necessarily reflect the UK government’s official policies. The report has been prepared as part of a broader program of the Disaster Risk Financing and Insurance Program. 2 Contents Summary ........................................................................................................................................................................ 6 1. Introduction .......................................................................................................................................................... 8 2. Infrastructure investment gap and potential role for insurance companies ........................................................9 3. What is infrastructure? .......................................................................................................................................12 3.1. Definition.................................................................................................................................................... 12 3.2. Investment instruments and ‘routes’ to infrastructure investment ..........................................................14 4. Overview of infrastructure investments in the insurance sector .......................................................................15 4.1. What are major drivers and barriers for insurers to engage in infrastructure? ........................................15 4.2. Allocation to infrastructure ........................................................................................................................16 4.3. Investment routes to infrastructure ..........................................................................................................17 5. Insurance regulation on infrastructure investments ..........................................................................................19 5.1. Europe/Solvency II .....................................................................................................................................19 5.2. U.S. .............................................................................................................................................................21 5.3. China .......................................................................................................................................................... 21 5.4. Singapore ...................................................................................................................................................22 5.5. South Africa ................................................................................................................................................22 5.6. Global insurance capital regulation ...........................................................................................................22 5.7. Regulatory barriers..................................................................................................................................... 22 6. Case studies in selected insurance markets .......................................................................................................24 6.1. Overview of the market examples .............................................................................................................24 6.2. Europe ........................................................................................................................................................25 6.3. U.S. .............................................................................................................................................................28 6.4. China .......................................................................................................................................................... 29 6.5. Japan ..........................................................................................................................................................30 6.6. Singapore ...................................................................................................................................................33 6.7. South Korea ................................................................................................................................................ 35 6.8. South Africa ................................................................................................................................................37 7. Lessons learned from experiences so far ............................................................................................................38 7.1. Promotion of infrastructure investments as part of sound asset liability management ...........................38 7.2. Leveraging insurers’ asset management function to scale up infrastructure investments ....................... 39 7.3. Ecosystem around infrastructure and availabilities of investment opportunities ..............................................40 7.4. Data on infrastructure investments and benchmarking ............................................................................41 8. Conclusions .........................................................................................................................................................42 Reference.....................................................................................................................................................................46 Annex ...........................................................................................................................................................................48 Figures Figure 1: Infrastructure investment gap and insurance penetration ............................................................................9 Figure 2: Illustration of insurers’ roles by development stage .................................................................................... 10 Figure 3: Infrastructure investment spectrum ............................................................................................................15 Figure 4: Drivers of portfolio allocation toward infrastructure by market segment ...................................................16 Figure 5: Median Allocation to Infrastructure by investor type, 2015 and 2019 (as % of AUM) ................................17 3 Figure 6: Investors’ preferred investment route to infrastructure by investor type ...................................................18 Figure 7: Insurers’ appetite for separate accounts and co-investments in infrastructure ..........................................19 Figure 8: Overview of MCPP Infrastructure .................................................................................................................26 Figure 9: Scheme of Cosmic Blue PF Trust Lily.............................................................................................................32 Figure 10: Structure of Project finance CLO - Bayfront Infrastructure Capital Pte. Ltd ...............................................34 Figure 11: Infrastructure investment models by technical capacity and infrastructure financing market settings ...............45 Tables Table 1: Infrastructure investment gap and insurance penetration in UMICs, LMICs and LICs ..................................11 Table 2: Infrastructure investment gap and insurance penetration in HICs................................................................ 12 Table 3: Examples of infrastructure in the IAIS’s public consultation in 2020 ............................................................ 13 Table 4: Typical liability characteristics and investment strategies for European insurers by business class .............16 Table 5: Spread risk capital charges (modified duration 20 years) under the Solvency II ...........................................20 Table 6: Equity capital charges under the Solvency II .................................................................................................20 Table 7: Characteristics of insurers’ roles in the infrastructure market by country ....................................................24 Table 8: Natixis’ infrastructure co-lending platform ...................................................................................................27 Table 9: Estimated proportions of infrastructure debts exposure at selected U.S. life insurers as of March 2020 ............28 Table 10: Examples of infrastructure equity funds established by China Life Investment ..........................................30 Table 11: Project financing loans for airport concessions that Japanese insurers underwrote ..................................33 Table 12: Key terms of the CLO issued by Bayfront Infrastructure Capital .................................................................35 Table 13: 10 largest infrastructure fund managers by capital raised for unlisted infrastructure funds in the 10 years until August 2016.........................................................................................................................................................37 Table 14: Infrastructure investment models for insurers ............................................................................................44 Table 15: Summary Statistics of infrastructure investment gap and insurance penetration by country income class........... 48 Table 16: Results of the estimated regression equation (1) and (2) ...........................................................................49 Table 17: Results of the estimated regression equation (1) and (2) for the life segment ...........................................49 Table 18: Results of the estimated regression equation (1) and (2) for the non-life segment ...................................49 Boxes Box 1: Qualifying infrastructure investments under Solvency II .................................................................................13 Box 2: Managed Co-Lending Portfolio Program and insurers’ role .............................................................................26 Box 3: Infrastructure debt funds co-designed by Japanese institutional investors .....................................................31 Box 4: Infrastructure debt investment platforms in Singapore ...................................................................................34 Box 5: Infrastructure funds investing in single projects in Korea ................................................................................36 4 Abbreviation AIIB Asian Infrastructure Investment Bank AMOAI Asset Management One Alternative Investments AUM Assets Under Management AXA IM AXA Investment Manager BIM Bayfront Infrastructure Management Pte. Ltd. CBIRC China Banking and Insurance Regulatory Commission CLO Collateralized Loan Obligation CPPIB Canadian Pension Plan Investment Board DB Defined Benefit DFI Development Finance Institution EAIF Emerging Africa Infrastructure Fund EC European Commission EIB European Investment Bank EIOPA European Insurance and Occupational Pensions Authority FoFs Fund of Funds FSB Financial Stability Board GA General Account GIH Global Infrastructure Hub HIC High-Income Country IAIGs Internationally Active Insurance Groups IAIS International Association of Insurance Supervisors ICS Insurance Capital Standard IFC International Finance Corporation KBAM KB Asset Management KIAMCOKDB Infrastructure Investments Asset Management Co. LIC Low-Income Country LMIC Lower Middle-Income Country MAS Monetary Authority of Singapore MCPP Managed Co-Lending Portfolio Program MDB Multilateral Development Bank MIC Middle Income Country MIRA Macquarie Infrastructure and Real Assets NAIC National Association of Insurance Commissioners PIC Pension Insurance Corporation RBC Risk-Based Capital RSB Risk-Based Supervision SWFs Sovereign Wealth Funds UMIC Upper Middle-Income Country Currency exchanges: Foreign exchange rates at the end of 2019 were used when amounts in local currencies were converted to USD in the text. 5 Developing Insurance Markets Insurance companies and infrastructure investments Tetsutaro Shindo and Fiona Stewart Summary Higher insurance penetration and smaller infrastructure investment gaps has been correlated even after accounting for GDP levels, which indicates the insurance industry may have made some contributions to this development. If insurers would allocate only 5% of their gross written premiums to infrastructure investments, it could cover nearly half of the annual investment gap. Nevertheless, insurers’ asset allocation to infrastructure appears insignificant compared to their total asset size in many countries. Their allocation to infrastructure stands at 1.5 percent of their assets on average in 2019, which is well behind other institutional investors such as sovereign wealth funds. With that said, China, Korea and the U.S. seem to be standing out in the select countries that this paper examined. Insurers have been promoting infrastructure investments as both asset owners and asset managers because this asset class makes sense from an ALM viewpoint and they can leverage their asset management function. The stable and long-term cash flows of infrastructure assets naturally align with liabilities of insurers, particularly life insurers. The prolonged low interest rate environment has also accelerated infrastructure investments in the insurance sector through the search for yield. While this paper mainly examined developed countries/regions including Europe, the U.S., Japan, China, Singapore, South Korea and South Africa, the infrastructure investment models in these countries are replicable in developing countries as well, depending on the countries’ context. Though infrastructure funds managed by external fund managers might be the ‘low-hanging fruit’ to access to infrastructure exposure for insurers, they could partner with foreign managers who are highly experienced in the infrastructure sector to drive development of the infrastructure financing market. A co-lending platform with a co-lending operator such as a development bank can be an alternative route that supports an investor’s investment decisions. Where an appropriate legal framework such as for special purpose vehicles and dispute resolution exists, and an investor base is sufficient, project bonds could also be useful for insurers. Creating an ecosystem around infrastructure finance and different types of market players is of high importance. In a developing country where banks are already dominant in infrastructure financing and a risk-based framework for the banking sector constrains them from providing long-tenor financing, the roll-over model could work. Depending on the internal technical capacity, an insurer could directly acquire project financing loans from a bank’s balance sheet or partner with a seasoned infrastructure fund manager to structure a fund acquiring such loans. Even in a developing country, an insurer could directly invest in individual projects based on its own assessment if they have in-house professionals with sufficient experience and expertise in the infrastructure space. However, only larger insurers might be 6 able to take advantage of direct investments as it entails costs to retain specialist staff. It is also critical to ensure interests are aligned between originators/platform operators and investors. Finally, governments and national supervisors can support infrastructure investments in several ways, including establishing a clear definition for infrastructure and compiling data, lowering capital charges on infrastructure investments (if their different treatment is evidence-based), facilitating credit enhancement mechanism and the increase of investible infrastructure projects, etc. In some cases, more clarity may be required on capital charges between infrastructure and securitized assets. Restrictions on direct investments to infrastructure could also be lifted under appropriate risk-based supervision in place unless being harmful to the interests of policyholders. 7 1. Introduction The global infrastructure financing gap is well acknowledged. In general, infrastructure is physical assets that provide essential services, such as electricity, gas and water utilities, roads, airports, etc. According to estimates by the Global Infrastructure Hub (GIH),1 additional USD13 trillion will need to be invested globally in infrastructure projects between 2020 and 2040, which translates into average USD630 billion per annum, to meet the infrastructure investment need. International forums, such as the G20, often advocate a need to mobilize private capital from institutional investors - including insurers, pension funds, asset managers - to reduce the gap. Reducing the gap is also a well acknowledged challenge – with insurance companies potentially playing an important role. Banks are increasingly discouraged from providing and holding long-tenor loans due to the sector’s regulatory framework. As a consequence, the Financial Stability Board (FSB) has pointed out that banks, particularly those with weaker liquidity profiles and global systemically important banks, have reduced the maturities of infrastructure loans since 2010, the year in which the initial Basel III regulatory framework was agreed (FBS, 2018). The fiscal positions of governments cannot alone fund such significant investments, due to their own balance sheets becoming ever more stretched though several crises (including the Global Financial Crisis, the European sovereign debt crisis and the COVID-19 pandemic), all of which have increased public debt levels and weakened fiscal positions. Thus, expectations for institutional investors to fill the investment gap have been rising over the last decade. According to AXCO - a provider of insurance sector data - total gross premiums written by insurance companies around the world amount to USD5.8 trillion in 2018. If insurance companies would allocate only 5% of their gross written premiums to infrastructure investments, it could cover nearly half of the annual investment gap. Global insurance companies have arguably already been focusing on infrastructure investments. Infrastructure is an alternative asset class to which institutional investors have made allocations for a long period of time. While it is notable that Australian and Canadian pension funds have been very active in infrastructure investments, global insurers are also following this trend. There appear to be two main driving forces that have pushed insurers to the infrastructure space. First, risk-based supervision (RBS) has been implemented in the insurance sector which encourages insurance companies to match their assets with their liabilities. The long-term and stable cash flows that infrastructure assets generate fit insurance liabilities, particularly those of life insurance companies. Second, the low interest rate environment prevailing since the Global Financial Crisis in the late 2000s accelerated the so-called “search for yield” by the insurance industry into new asset classes such as infrastructure. Nevertheless, the lack of statistics and data has not allowed to carry out enough research that demonstrate the role played by insurers in infrastructure investments. This paper aims to take stock of infrastructure investments by the insurance sector, review regulatory treatment and issues, and showcase useful examples that could be replicated in other markets. It intends to portray the high-level picture, rather than conducting detailed comparisons, as there is no universal definition and comparable data for infrastructure in the insurance sector across countries at this point. While there are many general 1 Based on data which was disclosed as Infrastructure Outlook as of this writing (https://outlook.gihub.org/). 8 impediments such as political uncertainty, a lack of liquidity, counterparty risk, etc. in infrastructure markets of developing countries, our focus is more on the perspective of the insurance sector in this paper. 2. Infrastructure investment gap and potential role for insurance companies As would be expected, countries with higher insurance penetration rates tend to have smaller infrastructure investment gaps – both being correlated with GDP levels. Although there is a huge infrastructure investment gap around the world, its size varies widely by country. The GIH estimates the infrastructure investment gap as a percent of GDP in 2018 ranges from zero (Singapore) to 5.7 percent (Tanzania) with a median of 0.9 percent across 56 countries that it covers. Figure 1 shows the relationship between infrastructure investment gaps as a percent of GDP and insurance penetration rates, which are defined as premiums to GDP, by country income class: high-income countries (HICs); upper middle-income countries (UMICs), lower middle-income countries (LMICs); low-income countries (LICs). One can observe (1) lower income countries tend to have larger gaps; (2) countries with higher insurance penetration rates tend to have smaller gaps. Figure 1: Infrastructure investment gap and insurance penetration 16 14 HIC UMIC 12 LMIC Insurance penetration (%) 10 LIC 8 6 4 2 0 0 1 2 3 4 5 6 Infrastructure investment gap to GDP (%) * The infrastructure investment gap is based on the GIH’s estimates for 2018. The insurance penetration uses data for 2018 except for Bangladesh, Ethiopia, Nigeria and South Africa (2017 figures used). The insurance penetration for Guinea and Rwanda includes the non-life segment only. The same applies to our regression analysis. Annex provides these underlying data across 56 countries. Source: Authors’ analysis based on data from GIH and AXCO That said, after accounting for GDP levels, there does appear to be a strong correlation between higher insurance penetration and smaller infrastructure investment gaps – which suggests the insurance industry may have made some contributions to this development. According to a regression analysis undertaken for this paper (see Annex), insurance penetration is strongly correlated with the infrastructure investment gap in developing countries even after taking into account income levels. This is presumably because insurers which earn larger premiums relative to the country’s GDP are an additional source of 9 capital for infrastructure companies and projects. Although insurers in developing countries may not invest in infrastructure projects directly, some of the capital that they provide may go towards equity investments in listed infrastructure companies in sectors such as utility, transportation, etc. In addition, insurers help governments to finance infrastructure projects as they buy and hold government bonds – which is key as more than 80 percent of the global spending on infrastructure investments is provided by the public sector (World Bank, 2019). It is also notable that life insurance penetration is more correlated with the infrastructure investment gap than non-life insurance penetration. This indicates infrastructure assets may be a better fit for life insurance than non-life as the former has typically a longer liability duration. While life insurance often lags behind non-life in developing countries, fostering savings types of life insurance such as annuities, endowment policies, single premium whole life, etc. would make more contribution to reducing the infrastructure investment gap. There could be ‘sweet spot’ in countries where insurance markets are beginning to grow, and where infrastructure needs are still very large, for the sector to be able to have most impact in terms of closing the funding gap. Only a few countries in the world have shown higher insurance penetration rates but larger infrastructure investment gaps at the same time. By way of contrast, countries with nascent insurance markets and larger infrastructure investment gaps may not able to expect domestic insurers to be able to contribute too much at this stage. However, where the insurance industry is modest but growing, and infrastructure needs are still large, the sector may be able to make a contribution to filling the financing gap. Finally, typically larger firms operating in the countries with higher insurance penetration rates and smaller infrastructure investment gaps may want to seek overseas infrastructure investment opportunities if their risk tolerance levels allow. Figure 2 illustrates insurers’ roles by development stage. Figure 2: Illustration of insurers’ roles by development stage High Insurers in these countries may want to seek overseas infrastructure investment Insurance penetration opportunities. The insurance sector could play a key role to narrow The insurance sector may be the infra gap while it needs too nascent. Governments, to be further developed. banks and foreign investors could play a larger role. Low Small Infrastructure investment gap Large Source: Authors Looking at data on infrastructure investment gaps and insurance penetration rates by country suggests countries and regions where the insurance sector might have a greater role to play. Table 1 shows the 39 middle income countries (MICs) and LICs which the GIH covers, along with infrastructure investment gaps and insurance penetration rates, listed in decreasing order of infrastructure investment gap. Although drawing clear boundaries is not necessary or possible, this suggests that there are some 10 countries in the Latin American and Sub-Saharan Africa region where there are still large infrastructure investment gaps, but with developing insurance markets to draw upon. Some MICs stand out as having still significant infrastructure needs and relatively well-developed insurance markets which could help plug these gaps. Finally, there is a group of countries, mostly in Asia, which have lower infrastructure needs but large insurance markets to draw upon. Table 1: Infrastructure investment gap and insurance penetration in UMICs, LMICs and LICs Income Infrastructure Insurance Income Infrastructure Insurance Country Region Country Region class investment gap (%) penetration (%) class investment gap (%) penetration (%) Tanzania SSA LIC 5.74 0.53 Vietnam EAP LMIC 1.23 2.40 Ethiopia SSA LIC 5.70 0.40 Jordan MENA UMIC 1.21 2.02 Guinea SSA LIC 5.22 0.08 Nigeria SSA LMIC 1.18 0.28 Myanmar EAP LMIC 4.01 0.13 Pakistan SA LMIC 1.08 0.83 Benin SSA LIC 3.98 0.70 Cote d'Ivoire SSA LMIC 0.95 1.36 Cambodia EAP LMIC 3.42 0.77 Morocco MENA LMIC 0.94 3.70 Senegal SSA LMIC 3.08 1.32 Peru LAC UMIC 0.90 1.67 Ghana SSA LMIC 2.87 0.87 Colombia LAC UMIC 0.88 2.84 Rwanda SSA LIC 2.66 1.64 Thailand EAP UMIC 0.64 5.87 Angola SSA LMIC 2.50 0.55 Malaysia EAP UMIC 0.64 3.66 Bangladesh SA LMIC 1.89 0.49 India SA LMIC 0.55 3.58 Brazil LAC UMIC 1.84 2.18 Philippines EAP LMIC 0.55 1.69 Egypt MENA LMIC 1.82 0.75 Azerbaijan ECA UMIC 0.39 0.91 Ecuador LAC UMIC 1.53 1.97 China EAP UMIC 0.38 4.30 Argentina LAC UMIC 1.52 2.31 Indonesia EAP LMIC 0.20 1.66 Russia ECA UMIC 1.50 1.51 Romania ECA UMIC 0.16 1.06 Paraguay LAC UMIC 1.48 1.06 Kenya SSA LMIC 1.36 2.43 Infrastructure inv't gap (%) Insurance pentration (%) Tunisia MENA LMIC 1.34 2.30 2.0 ≤ x 4.0 ≤ x 1.5 ≤ x < 2.0 1.0 ≤ x < 2.0 South Africa SSA UMIC 1.28 15.80 1.0 ≤ x < 1.5 2.0 ≤ x < 3.0 Mexico LAC UMIC 1.25 2.28 0.5 ≤ x < 1.0 1.0 ≤ x < 2.0 Kazakhstan ECA UMIC 1.25 0.56 0 ≤ x < 0.5 0 ≤ x < 1.0 Turkey ECA UMIC 1.23 1.32 Source: Authors’ analysis based on data from GIH and AXCO Insurers in HICs with smaller infrastructure investment gaps could be a source of foreign capital for developing countries with larger infrastructure investment gaps (Table 2). These developing countries typically have limited domestic capital markets and institutional investors. Although there are a number of obstacles to bring foreign investors to the infrastructure projects in emerging markets, policymakers in such countries might have some opportunities to tap into insurers in HICs, which are seeking foreign infrastructure investment opportunities, mostly to access higher returns. 11 Table 2: Infrastructure investment gap and insurance penetration in HICs Income Infrastructure Insurance Region class investment gap (%) penetration (%) Singapore EAP HIC 0.00 7.76 Germany ECA HIC 0.01 6.05 France ECA HIC 0.01 10.22 Canada NA HIC 0.03 7.21 Japan EAP HIC 0.06 7.94 South Korea EAP HIC 0.07 10.75 Spain ECA HIC 0.12 5.20 United Kingdom ECA HIC 0.14 13.17 New Zealand EAP HIC 0.25 3.57 Australia EAP HIC 0.33 5.53 Saudi Arabia MENA HIC 0.47 1.19 Uruguay LAC HIC 0.47 2.50 Poland ECA HIC 0.48 2.83 Croatia ECA HIC 0.55 2.57 Italy ECA HIC 0.55 7.65 United States NA HIC 0.56 11.41 Chile LAC HIC 0.57 4.65 Source: Authors’ analysis based on data from GIH and AXCO 3. What is infrastructure? 3.1. Definition The definition of infrastructure varies by country, supervisor and company. According to the Solvency II - the harmonized EU insurance regulation - infrastructure assets are defined as “physical assets, structures or facilities, systems and networks that provide or support essential public services”. However, the meaning of infrastructure can be different from one jurisdiction to another, which often leads to a challenge in data aggregation and comparison. Although the U.S. insurance regulation does not recognize infrastructure as a separate asset class that could benefit from differentiated capital charges, the National Association of Insurance Commissioners (NAIC), which is the standard-setting organization in the U.S. insurance sector, is currently conducting a study on infrastructure investments in the industry. The NAIC defines infrastructure as “long-lived, capital intensive, large physical assets that provide essential services or facilities to a country, state, municipality or region and contribute to its economic development or prosperity” and focuses on economic infrastructure only.2 Usually, economic infrastructure includes transportation, telecommunications, electricity, water supply, waste management facilities and the like while social infrastructure means assets that accommodate social services, such as hospitals, schools, museums, prisons, etc. The International Association of Insurance Supervisors (IAIS), which is the international standard-setting body for the supervision of the insurance sector, is currently conducting a public consultation seeking input from stakeholders to examine whether infrastructure should be differently treated in terms of capital charges in the Insurance Capital Standard (ICS). For this purpose, a definition for infrastructure assets inspired by Solvency II is being used. That said, categories which are included in infrastructure investments in the ICS could differ from those in Solvency II. The IAIS provides more concrete examples for what is infrastructure and what is not – including the following indicative list (Table 3). 2 The NAIC mentioned separate study of social infrastructure will be considered in the future. 12 Table 3: Examples of infrastructure in the IAIS’s public consultation in 2020 What is infrastructure What is not infrastructure Water utilities Water supply/distribution, Fixing water pipe leakages. waste water collection/treatment. Waste management Facilities dedicated to waste management and Using spare parts from scrapped utilities recycling. vehicles for other vehicles. Electricity and gas Generation/transmission/distribution Batteries used in electric cars, utilities /storage/district heating. insulation of houses. Transportation Airports/ports/roadways/railway network. Car, aircraft, boat manufacture, spare parts for aircrafts, etc. Telecom Core telecom infrastructure (e.g. broadband Production and selling of equipment, optical fibers, telecommunication telephones, Internet Service towers). Provider. Social infrastructure Infrastructure that provides a service for the public that is regulated or governed by a government or a similar authority (e.g. courts, prisons, juvenile facilities, schools, universities, libraries, refugee camps, subsidized housing, hospitals, etc.). Source: IAIS In addition to categorizing infrastructure by sub-sector, infrastructure projects are often separated into greenfield and brownfield according to the life cycle of the asset. Greenfield projects refer to those yet to be constructed while brownfield projects are already operational and generate cash flows from underlying assets. As greenfield projects include construction risk, they usually require higher returns. Whether an investor prefers greenfield or brownfield investment depends on the nature of its liabilities including the required return, risk tolerance level and duration. For a regulatory purpose, a concept of qualifying infrastructure can be introduced to specify infrastructure eligible for different treatment in a risk-based capital framework. A regulator could limit qualifying infrastructure investments to certain areas in terms of geography, credit quality and seniority (in the case of debt), or types of revenues from infrastructure assets (e.g. revenues must be availability- based). As reference, Box 1 displays Solvency II’s criteria for qualifying infrastructure investments. Box 1: Qualifying infrastructure investments under Solvency II To qualify as an infrastructure entity which can benefit from lower capital charges under the standard formula of the Solvency II framework, it must fulfill a number of criteria set by regulation though most of them are qualitative. The followings are a list for Solvency II’s qualifying investment in infrastructure entities (different criteria apply to investment in infrastructure corporates). These are non-exhaustive and indicative only, and readers should refer to the Solvency II regulation for the details. Characteristics of infrastructure assets and entity - The infrastructure entity’s cash flows for investors are predictable (e.g. the revenues are availability-based, subject to a rate-of-return regulation or based on a take-or-pay contract); - The infrastructure assets and entity are governed by a regulatory or contractual framework to protect investors (e.g. security in all assets and contracts critical to the project for debt investors, limited use of net operating cash flows, restrictions on new debt issuance without consent); 13 - In the case of the infrastructure project in the construction phase, the equity investors have a successful track record of overseeing infrastructure projects with the relevant expertise, a low risk of default or material losses, and incentives to protect the interests of investors; - The infrastructure entity uses tested technology and design. Location of infrastructure assets and entity - The infrastructure assets and entity are located in the European Economic Area or the OECD in respect to infrastructure equity or debt for which a credit assessment by a nominated external credit assessment institution is not available. Capital structure and refinancing risk - The investment instrument and other pari passu instruments are senior to all other claims other than statutory claims, etc.; - The capital structure of the infrastructure entity allows it to service its debt; - The refinancing risk for the infrastructure entity is low. Holding period - The insurer is able to hold the investment to maturity. 3.2. Investment instruments and ‘routes’ to infrastructure investment Infrastructure investments are composed of different financial instruments such as through equity (common equity), debt (e.g. project financing loans, project bonds) or mezzanine (e.g. subordinated debt, preferred equity), depending on investors’ preference in terms of risk and return characteristics. For example, the Canadian Pension Plan Investment Board (CPPIB), which is one of the largest public pension funds actively investing in infrastructure, holds infrastructure exposure of CAD34.6 billion (6.5 percent of total investments) at the end of March 2020, through essentially equity. 3 Similarly, U.S. public pension funds often invest more in infrastructure equity than debt. On the other hand, U.S. insurers show more appetite in infrastructure debt. There are also different investment ‘routes’ to executing investments in infrastructure. In order to access infrastructure exposure, investors need to consider investment options, including investments in infrastructure corporates’ equity or debt; fund investments in a diversified group of projects; separate accounts managed by fund managers;4 co-investments and co-lending platforms; or direct investments in individual projects (Figure 3).5 It is often the case that investors utilize multiple options rather than pick one on the spectrum outlined below. 3 The CPPIB separately discloses exposure to power and renewables (CAD8.7 billion) and energy and resources (CAD7.2 billion), which could be categorized to infrastructure for other investors. 4 Separate accounts are also known as separately managed accounts. 5 Listed equity and debt of incumbent infrastructure corporates, e.g. utility companies, are often out of scope for a separate infrastructure asset class though it is a gray zone. 14 Figure 3: Infrastructure investment spectrum Infrastructure Infrastructure Separate Co-investments/ Direct investments accounts corporate funds managed by fund co-lending in individual debt/equity (commingled) platforms projects managers Source: Authors Institutional investors, including insurers, sometimes make direct investments, but most invest via professionally managed infrastructure funds. While larger sophisticated institutional investors are often capable of investing directly in infrastructure projects themselves (whether through debt or equity), many institutional investors hire experienced specialist infrastructure fund managers. This allows for the construction of a portfolio of projects which diversifies risk. Although most investment funds investing in infrastructure are unlisted, listed funds are available in some markets. The assets under management (AUM) of listed infrastructure funds amounted to USD57 billion globally as of July 2017 according to EDHEC – an infrastructure benchmark provider - while Preqin reported unlisted infrastructure funds’ AUM at USD582 billion as of June 2019. 4. Overview of infrastructure investments in the insurance sector 4.1. What are major drivers and barriers for insurers to engage in infrastructure? The search for yield and duration matching are major drivers for insurers investing in infrastructure. The FSB conducted a survey in early 2018, with 90 financial institutions (including 20 insurers), revealing what factors have driven and hindered investment decisions in infrastructure. It is notable that insurers pointed out the search for yield and tenor match more strongly than banks and asset managers. This is consistent with the fact that many life insurers still carry legacy liabilities with high guaranteed rates of return (including whole life, annuities, etc.). In addition to the above, credit rating availability and supply of investible projects are also important factors to promote infrastructure investments by the insurance sector. Insurance liabilities vary by market, and so does their investment preference . In general, life insurance products with guaranteed rates of return which are used for an assumption for premium calculation prefer fixed investment returns (i.e. fixed income) while life insurance products such as unit-linked whose investment returns are borne by policyholders might opt for investment returns with upside potential, e.g. infrastructure equity. For example, in UK where unit-linked products are dominant in the life insurance sector, equity comprised 10 percent of the total assets in the traditional business segment while comprising 27 percent in the unit-linked segment at the end of 2019. Table 4 describes typical liability characteristics and investment strategies by business class in the European insurance sector. 15 Table 4: Typical liability characteristics and investment strategies for European insurers by business class Average duration of Required Target returns Typical investment Liability category liabilities liquidity /guarantees strategy 5 years (typically, 1-5 Medium Typically, no Non-life years but could be Short-term, liquid return guarantees longer in some products) Life where insurers Investment Asset liability take investment risk 13 years (typically, 8-20 guarantees matching while aiming Low (e.g., traditional life, years) often built into to achieve guaranteed annuities) products returns Life where Maximizing returns policyholders take 11 years (could be Target benchmark High given policyholders’ investment risk (e.g., shorter) fund returns preference to take risk unit-linked) Source: Authors’ analysis based on EIOPA (2019) and Insurance Europe and Oliver Wyman (2013) Currency mismatch and currency risk hedging are major challenges for insurers to increase their infrastructure exposure, followed by political risk and regulation. While currency does not affect insurance companies’ domestic investments, the search for yield sometimes pushes them to seek foreign infrastructure investments. As insurers usually underwrite most of their policies in national currencies, currency mismatch between assets and liabilities and a lack (or high cost) of currency hedging become impediments when they pursue foreign infrastructure assets. Whilst regulation may disincentivize insurers seeking infrastructure investments, it appears that the magnitude of its negative impact appears to be smaller for them than banks, according to the FSB (see Figure 4). Figure 4: Drivers of portfolio allocation toward infrastructure by market segment Source: FSB (2018) 4.2. Allocation to infrastructure Although insurers have been increasing their exposure to infrastructure, their asset allocation to the sector appears insignificant compared to their total asset size. According to a report published by Preqin, insurers’ allocation to infrastructure amounted to 1.5 percent of their total assets in 2019, increasing by 0.5 percentage point from 1.0 percent in 2015 (Figure 5). They are well behind other institutional investors such as sovereign wealth funds (SWFs), public or private pension funds, etc. As Preqin’s research also reveals, insurers target 3 percent of their assets to be allocated to infrastructure, with the 1.5 percent 16 unfilled target translating into around USD490 billion globally.6 In fact, half of the insurers that Preqin interviewed in November 2018 intended to increase infrastructure allocations in the long-term. Figure 5: Median Allocation to Infrastructure by investor type, 2015 and 2019 (as % of AUM) Source: Authors’ analysis based on data from Preqin 4.3. Investment routes to infrastructure In order to have access to infrastructure investment opportunities, insurers prefer unlisted funds (i.e. private funds) to listed funds, while some insurers with sufficient investment expertise and resources prefer direct investments. According to Preqin surveys, 90% of insurers are in favor of unlisted funds while only 17% support listed funds (Figure 6). This is probably because they can take advantage of the illiquidity premium to achieve higher return and avoid market volatility and high correlation with listed equity to some extent through investments in unlisted infrastructure funds. With that said, it should be noted that unlisted infrastructure’s low correlation with listed equity might be partly due to the infrequent nature of valuation processes for unlisted assets. At the same time, some insurers (37%) also regard direct investments as a favorable route to gaining exposure to the asset class. These insurers are probably larger institutions, having sufficient investment expertise and resources (e.g. sophisticated credit assessment team with infrastructure experts, deal sourcing capabilities in the infrastructure sector, etc.). This is similar to SWFs and larger public pension funds in the U.S. and Canada, which tend to prefer direct investments followed by unlisted funds. 6 Statista estimated insurers’ total assets at USD32.9 trillion as of 2018 for Argentina, Australia, Brazil, Canada, Cayman Islands, Switzerland, Chile, China, UK, Hong Kong, Indonesia, India, Japan, Korea, Mexico, Russia, Saudi Arabia, Singapore, Turkey, the U.S., Euro Area and South Africa. 17 Figure 6: Investors’ preferred investment route to infrastructure by investor type Source: Authors’ analysis based on data from Preqin Most insurers invest or are considering investing in infrastructure through separate accounts that fund managers offer. Infrastructure fund managers often provide investors with separate accounts in addition to commingled funds. Commingled fund basically manages investors’ capital in one pool with the same strategy, and each investor equally benefits from the investment return of the fund. Separate accounts can be tailored to match the specific investment needs or policies of individual investors. Under a separate account offered by an infrastructure fund manager, for example, insurers could select a maturity threshold (e.g. longer than 10 years), sub-sectors and geographies of underlying loans or bonds as well as limit credit ratings of these debt above a certain level (e.g. single A). Though 30% of insurers currently invest in infrastructure through separate accounts, more than 60% of them are considering utilizing these investment vehicles (Figure 7). This aligns with other types of institutional investors (e.g. public pension funds, SWFs) which have also expressed a preference to customize the strategies according to their specific needs, with around 90% investing in separate accounts or considering using them (source Preqin). In addition, nearly half of insurers utilize co-investment opportunities offered by infrastructure fund managers. Through co-investments, investors invest on their own account alongside other investors, funds etc., allowing them to collectively bid on larger projects. Preqin’s research demonstrates that 47% of insurers co-invest in infrastructure alongside infrastructure funds, which indicates that they have a certain level of in-house capacity such as credit assessment teams etc. as co-investments require them to assess individual investment opportunities with input provided by fund managers (Figure 7). 18 Figure 7: Insurers’ appetite for separate accounts and co-investments in infrastructure 7 63 30 Separate accounts 41 12 47 Co-investments 0 20 40 60 80 100 % Do not invest Considering Invest Source: Authors’ analysis based on data from Preqin Insurers, particularly larger global insurers, are going one step further and appear to be moving towards direct investments in individual projects. Just as SWFs and larger public pension funds recognized infrastructure as a separate asset class, insurers have been seeking opportunities to get exposure to individual infrastructure projects, which saves fees paid to fund managers or co-lending platform operators. This is the case particularly for larger global insurers in the U.S. and Europe. Such moves by insurers towards direct investments in individual projects are understandable because the characteristics of insurance liabilities vary by company and each insurer pursues different infrastructure assets which match their liabilities. 5. Insurance regulation on infrastructure investments A limited number of insurance regulators treat infrastructure investments more favorably from other asset classes by applying lower capital charges, while many others still do not . Europe is a pioneer in this regard though the U.S. - the largest insurance market in the world - still does not embrace lower capital charges on infrastructure assets. While lower capital charges or lifting investment limits on infrastructure assets would promote infrastructure investments in the insurance sector, this should be accompanied by an appropriate risk-based supervision, including the prudent person principle which requires insurers to properly identify, measure, monitor, manage and report the risks they will take. This section focuses on how insurance regulators in selected jurisdictions deal with infrastructure in their regulatory frameworks with some regulatory barriers being presented at the end. 5.1. Europe/Solvency II Solvency II is the well-known risk-based capital (RBC) framework which applies to European insurance and reinsurance companies, and which includes a differentiated treatment of infrastructure investments where prudentially justified. Solvency II was put into effect in 2016 after long discussion and preparation. In February 2015, prior to the full implementation of the Solvency II, the European Commission (EC) issued a call for advice to the European Insurance and Occupational Pensions Authority (EIOPA) on a more granular treatment of infrastructure investments than originally planned within the regulatory framework. As per EIOPA’s advice, the EC amended Solvency II with a favorable treatment for 19 qualifying infrastructure investments regarding capital charges on such investments in April 2016. It should be noted that European insurers can decide to use the standard formula that is set by the Solvency II regulation or - subject to supervisory approval - their own internal models to calculate capital charges. As larger European insurers are reported to use internal models, the standard formula approach is more likely to affect mid-to-small insurers’ decisions to invest in infrastructure assets. Although the capital requirement for spread risk on fixed income varies by duration and credit quality under the standard formula, a 20-year infrastructure project debt with a rating of BBB, for example, requires 20% as spread risk capital charge, compared to 30% for other BBB-rated debts (Table 5). In addition to infrastructure debts, Solvency II has a differentiated treatment of qualifying infrastructure project equity as well, with a capital charge at 30% compared to 49% for other unlisted equity investments (Table 6).7 Furthermore, insurers can reduce the duration gap between their assets and liabilities by investing in long-tenor infrastructure debt, which leads to lowering the capital requirement for interest risk. The EC issued another call for technical advice on treatment of infrastructure corporates8 in October 2015 and the EIOPA issued a final recommendation paper to include infrastructure corporates in the regulatory framework in June 2016. The EC amended the standard formula approach where the capital requirement for equity investments in qualifying infrastructure corporates was lowered to 36% and that for qualifying infrastructure corporate debts was reduced by around 25%, compared to non-infrastructure debts. Table 5: Spread risk capital charges (modified duration 20 years) under the Solvency II Type of debt AAA AA A BBB Unrated Standard formula 12.0% 13.5% 15.5% 30.0% 35.5% Qualifying infrastructure projects 8.6% 9.7% 11.1% 20.1% 20.1% Qualifying infrastructure corporates 9.0% 10.2% 11.7% 22.5% 22.5% Source: EC Table 6: Equity capital charges under the Solvency II Type of equity Capital charge Listed equity 39% Unlisted equity 49% Qualifying infrastructure projects 30% Qualifying infrastructure corporates 36% Source: EC In UK, the Financial Conduct Authority (FCA) recently amended rules for unit-linked products to allow for more investments in illiquid assets, including infrastructure. Unit-linked life funds dominate the defined contribution (DC) pension market in the country, and assets which are associated with unit-linked products comprise more than 60 percent of the total assets held by the life segment. Unit-linked liabilities are more liquid than others in the life business as policyholders have an option to switch fund allocations and surrender charges are usually much smaller than those for traditional life products. Therefore, UK regulation specifies categories of assets in which insurers may invest for unit-linked life policies. In March 7 The effective capital requirement is lower due to diversification effects and the loss-absorbing effect of technical provisions and deferred taxes. Also, these do not take into consideration symmetric adjustment. 8 Under the Solvency II, infrastructure projects are entities that typically set up a new project involving the construction phase of an infrastructure. On the other hand, infrastructure corporates are entities that have matured into the operational phase. 20 2020, the FCA allowed unit-linked funds to invest in immovable assets such as rail track, bridges, roads, runways, wind turbines, solar farms, etc. At the same time, the authority requires an insurer to ensure that such investment does not stop a policyholder exercising rights under the unit-linked contract and that the investment risks are suitable for the policyholder.9 5.2. U.S. The NAIC is currently conducting research on infrastructure investments by the U.S. insurance industry and their policy implications. Although infrastructure investments have not been treated differently as a separate asset class in the U.S. insurance regulations, U.S. insurance companies have been relatively active in investing in infrastructure, particularly through private placement. This might have caused the U.S. regulators to be less focused on treatment of infrastructure assets before. With that said, in 2019 the NAIC started to request information and input from U.S. insurance companies on infrastructure investments including the definition and characteristics of infrastructure, the market size for infrastructure assets, the historical credit performance of infrastructure investments, and the treatment of infrastructure investments. The purpose of the study and information request is to examine: (1) infrastructure investment as an asset class and (2) the U.S. insurance industry’s participation in the infrastructure market, including barriers, opportunities, and regulatory considerations. The NAIC expects to release a report including the investment characteristics, market size, and credit performance in the summer of 2021 and another one including regulatory treatment, insurance industry exposure, and climate resiliency of infrastructure projects in the spring of 2022. 5.3. China Under the China Risk-Oriented Solvency System (C-ROSS), which came into effect in 2016, infrastructure is favorably treated in terms of capital charges. For example, a capital charge on unlisted infrastructure equity (infrastructure equity plan) is set at 12 percent while capital charges on unlisted equity and equity funds are 28 percent and 25 percent, respectively. In addition, infrastructure debt plans have 0.5 percentage point lower capital charges than corporate bonds with precise charges depending on the credit rating. Although the China Banking and Insurance Regulatory Commission (CBIRC) is currently aiming to upgrade the risk-based capital (RBC) framework (to C-ROSS II) and urge Chinese insurers to invest more cautiously, a proposed capital rule still includes favorable treatment of infrastructure equity. The proposed capital charge on infrastructure equity is reportedly 25 percent, which is still lower than charges on unlisted equity (41 percent) and equity funds (28 percent). In China, insurers are required to invest in infrastructure through investment vehicles. While insurers are allowed to invest in both equity and debt of infrastructure projects, regulation requires investment in infrastructure through an investment plan to be set up by a trustee, such as insurance asset management company, which in turn must hire a custodian. The trustee must submit registration materials and register with the registration agency designated by the CBIRC. The investment plan must include legal documents, including the investment plan’s prospectus, a custody contract, etc. The CBIRC must receive information such as the investment plan’s management reports by the trustee and investment reports by the 9 Financial Conduct Authority, March 2020, “Amendment of COBS 21.3 permitted link rules – final rules and feedback to CP18/40”. 21 insurance company. More than one insurer can invest in one investment plan, and one insurer can invest in more than one investment plan. 5.4. Singapore Singapore does not differentiate infrastructure from other assets at the moment while the treatment of infrastructure investments for RBC requirement will be consulted on by the Monetary Authority of Singapore (MAS). The authority has made efforts to upgrade the risk-based capital framework since 2013 and a new framework, RBC 2, came into effect in March 2020 after several consultations with the industry stakeholders. Although the new framework does not differentiate infrastructure investments from others in terms of capital requirement, the MAS intends to consult on the treatment of infrastructure investments as well as structured products. 10 Although capital charges on infrastructure has not been treated favorably in the country yet, the regulator is very supportive of establishing an infrastructure ecosystem as shown in the case studies section. 5.5. South Africa RBC framework in South Africa allows lower capital charges on infrastructure assets. South Africa is one of the few developing economies whose insurance regulation treats infrastructure favorably under the new Solvency Assessment and Management framework that took effect in July 2018. The framework generally follows Europe’s Solvency II and allows lower capital charges on both infrastructure equity and debt. 5.6. Global insurance capital regulation The IAIS is currently considering whether the ICS should treat infrastructure differently. The global insurance standard-setting body has been developing the ICS, which is intended to implement a global capital standard to Internationally Active Insurance Groups (IAIGs) by 2025. The proposed global capital regulation aims to implement a common RBC framework on the largest and most complex insurance groups in the world. Although it is not clear how the ICS treats infrastructure investments differently in terms of capital charges at this point, the IAIS established an Infrastructure Task Force to work on stock- taking of infrastructure investments in the sector and potential differentiated treatment of such investments in the proposed global capital standard. In this context, Jobst (2018) suggests significant reduction in capital charges on infrastructure debt compared to general corporate debt could be included in the ICS if the framework recognizes infrastructure debt as a separate asset class, based on his calibration exercises using Moody’s historical data. In concurrent with a five-year monitoring period for the implementation of the ICS, the IAIS’ study on infrastructure investments will be conducted over multiple years. At the time of writing, the IAIS is seeking input in a public consultation process on materials and data sources that aim to introduce different treatment of infrastructure investments. 5.7. Regulatory barriers There seem to be some impediments caused by regulation which could suppress insurance capital in developed countries flowing into infrastructure in emerging markets though regulatory barriers are 10 MAS Notice 133 22 relatively limited. Overall, regulation does not appear to be a major binding constraint, compared to other factors such as currency mismatch and hedging, credit rating availability, supply of bankable projects, political risk, etc. With that said, whilst insurance capital regulation in some countries allows lower capital charges on infrastructure, infrastructure assets in emerging markets may not be eligible for such relief. Under Solvency II, for example, the qualifying infrastructure assets are limited to those in the European Economic Area or in the OECD if these investments are in equities, or debts whose credit ratings are not available by nominated external credit assessment agencies. This intends to limit the complexity in assessing political risk and reflects the fact that the standard formula is designed to capture the risk profile of an “average” European insurer with a non-material allocation to these investments. Apart from Solvency II, higher capital charges on foreign investments are common in insurance capital frameworks and can be justified due to currency risk, political risk, etc. Nevertheless, granular differentiation of infrastructure assets from other assets within foreign investments (i.e. foreign infrastructure debt/equity vs foreign corporate debt/equity) could be an option that supervisors pursue if it is economically and practically reasonable (e.g. if high future volumes of foreign infrastructure investments are expected, and differentiated treatment is supported by evidence). Insurers in developing countries may have some regulatory barriers for domestic infrastructure investments. Although this paper examines mainly developed countries, insurance regulation in some developing countries does not allow for direct investments in infrastructure as shown in China. For example, insurers which operate in Vietnam and Thailand are also prohibited to invest directly in infrastructure projects (Overseas Development Institute, 2018). In addition, investment limits on unlisted equity might constrain infrastructure investments while they might not be necessarily binding. These restrictions could be lifted under appropriate risk-based supervision in place unless it does harm to the interests of policyholders. More clarity might be required on what capital charges must be applied on each financial instrument/scheme. For instance, when packaged financial instruments or schemes containing project financing loans or project bonds are tranched in order to provide credit enhancement to institutional investors who prefer investment-grade senior debt, such instruments might be regarded as securitized products requiring higher capital charges. That said, in a given jurisdiction, tranched infrastructure debt instruments may not always be considered securitized products subject to higher capital charges and the application may depend on the structure and characteristics of a specific instrument. In cases where a higher charge is unfairly applied to tranched senior infrastructure debt instruments or schemes without taking into account the purpose of credit enhancement, regulation may need to be clarified and reexamined. Aside from capital charges on infrastructure itself, ensuring insurance regulatory frameworks treat ‘blended finance’ appropriately is also important. When global insurers, which typically prefer investment-grade assets, aim to invest in infrastructure in developing countries, they often utilize credit enhancement by development finance institutions (DFIs) or multilateral development banks (MDBs) to make an infrastructure project investable. Treatment of credit enhancement or transactions with DFIs/MDBs should be well clarified in a regulatory framework. If there is an unintended barrier caused by regulation for insurers to utilize credit enhancement or other investment service provided by DFIs/MDBs, supervisors should revisit regulations for enhanced clarity and predictability. 23 6. Case studies in selected insurance markets 6.1. Overview of the market examples There are some similar practices in the role that insurance companies play in the infrastructure sector across different countries. One can observe some trends such as: - leveraging the resources and expertise of insurance asset management companies (i.e. asset management arms of insurers); - foreign infrastructure asset managers contributing to infrastructure market development; - partnership with banks by utilizing co-lending platforms or acquiring project financing loans (which previously sit on banks’ balance sheets) through roll overs; - gradual shift to direct investments in individual projects; Table 7 displays some observations on the characteristics of different infrastructure markets in terms of insurers’ roles, followed by a description of individual market examples in Europe, U.S., China, Japan, Singapore, South Korea and South Africa. Readers who are not interested in case studies of individual countries/companies can skip the rest of this section and jump to the section 7: Lessons learned from experiences so far. Table 7: Characteristics of insurers’ roles in the infrastructure market by country Europe - Insurance asset management companies playing a key role for accessing individual projects and establishing infrastructure funds - Utilizing co-lending platforms (e.g. IFC’s MCPP, Natixis’s platform) - Interest in infrastructure in developing countries - Pension risk transfer transactions to mobilize DB plans’ capital - Project bonds supported by EIB’s credit enhancement U.S. - Leveraging insurance asset management companies’ expertise - Playing an essential role in private placement for individual projects China - Insurers as key investors for government-led infrastructure projects - Insurance asset management companies playing a key role, sometimes with foreign fund managers - Insurers required to establish investment plans for infrastructure assets Japan - Utilizing infrastructure funds to acquire foreign project financing loans via roll overs from banks - Leveraging insurance asset management company’s expertise to establish infrastructure FoFs - Gradual shift to direct investments in individual projects Singapore - Insurance regulator created a supportive infrastructure eco-system - Utilizing infrastructure funds to acquire project financing loans via roll overs from banks South Korea - Foreign infrastructure fund managers contributing to the infra market development - Insurance asset management companies playing a key role with foreign fund managers - Deal-by-deal infrastructure funds common - Gradual shift to investments to individual projects, sometimes overseas South Africa - Insurance asset management companies playing a key role including establishing infrastructure funds Source: Authors 24 6.2. Europe European insurers have been leading in the infrastructure investment space for years. According to Amariei (2020), their allocation to infrastructure stands at EUR171 billion, which accounts for 2.3% of their total assets as of 2017. Their exposure to infrastructure appears to be mainly through direct investments – EIOPA’s insurance statistics shows infrastructure funds accounts for only 0.3% of their total assets as of 2019, which is behind private equity funds (0.6%), real estate funds (1.7%). Europe supports the issuance of project bonds through the Europe 2020 Project Bond Initiative – a joint initiative of the EC and the European Investment Bank (EIB). Based on the legal base signed by the EC and the EIB in 2012, the EIB provides credit enhancement to eligible infrastructure project bonds in the sectors of transport, energy and information and communication technology. The EIB’s credit enhancement to project bonds can take the form of a subordinated loan or a contingent credit line to support senior debt service and cover the lifetime of the project, including the construction phase. The maximum amount by the credit enhancement program is EUR200 million or 20 percent of the nominal of credit-enhanced senior bonds. Insurers and other institutional investors have benefited from this credit enhancement program which has been used for project bonds issued in a number of European countries. By way of a regional example, Allianz, a leading German insurer, invests in infrastructure as both asset owner and asset manager. At the end of 2019, infrastructure assets comprise around 4 percent of Allianz’s total investment portfolio.11 What is distinctive about Allianz’s approach is that it holds a considerable amount of infrastructure equity, amounting to around 1.7 percent of total infrastructure assets. Although Allianz mainly focuses on infrastructure assets in developed markets, it is selectively expanding to emerging markets. One example is its commitment to investing USD500 million in Managed Co-Lending Portfolio Program (MCPP), which is managed by the International Finance Corporation (IFC) and which invests in infrastructure projects in emerging countries. Another example is its investment in Emerging Africa Infrastructure Fund (EAIF), which is part of the Private Infrastructure Development Group, a donor- backed organization that mobilizes private capital into infrastructure investment in the world’s lowest- income countries. The insurer provided over 12-year financing of EUR75 million and USD25 million to the EAIF in 2018. Allianz is also engaged in infrastructure investments through its asset management business Allianz Global Investors with commitments to over EUR17 billion infrastructure debts and over EUR17 billion infrastructure equity.12 The asset manager is one of the lead arrangers that have invested in project bonds13 supported by the aforementioned EIB’s credit enhancement program. Allianz Global Investors also plays a role in mobilizing other investors’ private capital into infrastructure by providing several infrastructure funds both equity and debt.14 11 The infrastructure assets here include infrastructure equity of EUR9.3 billion, renewable energy equity of EUR4.3 billion and Infrastructure debt of EUR17.4 billion. Total investment portfolio is based on economic value. 12 This includes renewable energy equity. Allianz Global Investors’ subsidiary, Allianz Capital Partners, is responsible for infrastructure equity investments as asset management business. 13 These projects include (but not limited to) A11 motorway in Belgium, Port of Calais in France, N25 New Ros Bypass in Ireland, Passante di Mestre motorway in Italy. 14 For example, Allianz European Infrastructure Fund (equity fund), Allianz UK Infrastructure Debt Fund I & II. 25 Box 2: Managed Co-Lending Portfolio Program and insurers’ role The IFC’s MCPP is a syndications platform for institutional investors to access and accumulate exposure to diversified portfolios in emerging markets by mimicking IFC’s own future portfolio. While the MCPP can be an investment platform for all sectors, it is mainly used for gaining exposure to infrastructure and financial institutions. So far, USD1.6 billion has been raised for MCPP Infrastructure from Allianz Global Investors, Eastspring Investments (Asian investment management arm of Prudential plc) and AXA. As the IFC identifies eligible deals aligned with the pre-agreed criteria and concentration limits between investors and the IFC, investment exposure is allocated to investors along with the IFC’s own book. Investors can take investment-grade exposure in a senior tranche as the IFC provides first-loss coverage on the portfolio by taking a junior tranche (Figure 8). Figure 8: Overview of MCPP Infrastructure Source: IFC In addition to the above-mentioned funded platform, Swiss Re also provided risk coverage up to USD500 million by insuring a portion of the credit risk on IFC’s loans under the MCPP. This demonstrates the potential of insurance as a guarantee tool to take a credit risk in infrastructure assets. AXA, which is another leading European insurer of French origins, promotes infrastructure investments as part of green investments. At AXA, infrastructure investments, both debt and equity, comprise part of green investments by their own in-house definition. 15 In December 2019, AXA’s green investments amounted to EUR11.8 billion, which account for around 2 percent of total invested assets, including infrastructure assets.16 Going forward, AXA targets to increase green investments to EUR24 billion by 2023. To achieve the target, AXA Investment Manager (AXA IM), an asset management arm of AXA Group, will play an important role in increasing infrastructure exposure. According to Infrastructure Investor, AXA IM ranked fourth among the world’s largest infrastructure debt managers, with EUR6 billion AUM of infrastructure debt investments on behalf of AXA Group and third-party investors. 17 In addition to infrastructure debt, AXA IM manages EUR1 billion of infrastructure equity investments for the AXA Group. AXA is one of the investors which participated in the aforementioned MCPP managed by the IFC, with its commitment of USD500 million. 15 The insurer defines green investments as infrastructure investments, green bonds, impact investments, real estate, and commercial real estate loans. 16 This excludes unit-linked assets and assets related to banking activities. 17 Based on capital raised between January 2013 and August 2018. 26 The partnership between banks and insurers could empower the private sector’s role in the infrastructure sector. In 2012, Natixis, a French corporate and investment bank, launched a co-lending platform for institutional investors – mainly insurers so far – to invest in infrastructure debt. The French bank provides institutional investors with a pipeline of primary new infrastructure transactions including deals with both fixed and variable interest rates across various sectors and geographies as well as structuring and administration of transactions as a servicer and custodian. Potential transactions originated by Natixis are offered to the co-lending partners based on pre-agreed criteria, which vary across partners. However, investment decisions in each transaction will depend on the own assessment of each individual co-lending partner. To have ‘skin in the game’, Natixis is required to retain on its own balance sheet a portion of the transactions which are invested by co-lending partners. The Natixis’ platform consists of EUR4.5 billion for European assets from four European insurers and USD0.9 billion for assets outside Europe from two South Korean insurance groups as of 2020 (Table 8). Table 8: Natixis’ infrastructure co-lending platform Timing of Commitment Company name Country of origin participation amount (mil) Dec 2012 Ageas Belgium EUR2,000 Jun 2013 CNP Assurances France EUR2,000 Dec 2014 MACIF France EUR250 Dec 2015 Swiss Life Switzerland EUR300 Apr 2016 KB Insurance South Korea USD400 Apr 2016 Samsung Life, Samsung Asset Management South Korea USD500 Source: Authors’ analysis based of public information Pension risk transfer transactions structured by insurers – such as ‘buy-ins’ and ‘buy-outs’ – create opportunities for insurers to invest in infrastructure. Buy-ins and buy-outs of defined benefit (DB) pension schemes have been most common in UK since the mid-2000s, followed by the U.S. and Canada in the 2010s.18 While an insurance buy-out usually transfers all assets and liabilities under a DB pension scheme to an insurer and its beneficiaries become the insurer’s policyholders (i.e. legal separation from a corporate’s balance sheet), under an insurance buy-in contract a trustee of a DB pension scheme pays a single premium to an insurer which in turn guarantees to pay an income stream to the scheme. Although DB pension buy-ins and buy-outs are different in details, they have a similarity in that insurers are in charge of investments on behalf of the pension schemes that undertook the transactions. As DB pension liabilities usually have long duration often between 10 and 15years,19 pension risk transfer transactions promote insurers to invest more in infrastructure. Pension Insurance Corporation (PIC) in UK is an insurer that specializes in the pension risk transfer business and one of the largest market players in this field. For PIC, direct investments are essential, accounting for nearly 20 percent of its overall investment portfolio at the end of 2019. These direct investments contain infrastructure such as utilities (11 percent of total direct investments), project finance (7 percent), transport (3 percent) among others. Infrastructure assets fit PIC’s liabilities, which had an average duration of 14 years in 2020. Legal & General, another leading UK insurer with pension risk transfer business, estimates that over GBP150 billion could be invested by 18 Prudential Financial estimated that over USD 260 billion pension risk transfer transactions had been completed in UK (USD180 billion), the U.S. (USD67 billion) and Canada (USD16 billion) between 2007 and June 2015 (Prudential, 2015). 19 Moore, D., W. 2010. Understanding the duration risk in pension plans: The case for LDI . NEPC 27 pension risk transfer insurers in UK infrastructure to back their pension liabilities over the next decade. Although DC pension schemes have been gaining in popularity in many markets worldwide, DB pension schemes still constitute half of the total pension assets in primary markets.20 In this context, pension de- risking transactions could be a catalyst to foster infrastructure investment in countries where DB pension obligations remain a burden to corporates. 6.3. U.S. U.S. insurers have a strong appetite for investing in infrastructure through private placements. Whilst U.S. insurance companies have been investing indirectly in infrastructure through municipal bonds for years, interest in more direct investments in infrastructure appears to have been rising recently. The largest life insurers’ asset management arms often have a dedicated team responsible for private investments such as private placement21. For example, Prudential Private Capital – the private investment arm of PGIM, which is an asset management subsidiary of Prudential Financial – manages USD27.3 billion infrastructure debt as of March 2020. Infrastructure debt amounts to around USD20.1 billion22 at Private Capital Investors of NYL Investors, an investment management company owned by New York Life. The assets under management (AUM) for private infrastructure of MetLife Investment Management, a subsidiary of MetLife, stands at USD25.6 billion. Although the breakdown of the parent insurers and third- party clients within their asset management arms’ infrastructure debt AUM is not available, the proportions of infrastructure debts are estimated to be around 4% of total general account (GA) assets at Prudential Financial and MetLife and 7% at New York Life (Table 9). Table 9: Estimated proportions of infrastructure debts exposure at selected U.S. life insurers as of March 2020 General Account Estimated Infrastructure Proportion of Infrastructure Name of Fund Assets Debts exposure on GA Debts as % of Total General (USD billion) (USD billion) Account Assets Met Life 490.4 19.523 4.0 New York Life 268.024 20.125 7.5 Prudential Financial 524.7 20.626 3.9 Source: Authors’ analysis based on public information from Prudential Financial, New York Life and MetLife 20 Based on Global Pension Assets Study 2019 issued by Willis Towers Watson. The primary markets include Australia, Canada, Japan, Netherlands, Switzerland, UK and U.S. 21 Private placement refers to an issuance of securities to a limited number of accredited investors defined under U.S. regulation, and these securities are not publicly traded and registered with the U.S. Securities and Exchange Commission. 22 The proportions of Communications, Infrastructure & Power, Oil & Gas, Transportation and Utilities were summed up within NYL Investors’ USD44 billion private placement portfolio. 23 The private infrastructure amounts (USD25.6 billion) times the proportion of GA to the total AUM (76.2%) at MetLife Investment Management. 24 As of December 2019. 25 This may include some AUM form third-party clients though most of it is considered to be managed for New York Life’ general account. 26 The infrastructure investment amounts at Prudential Private Capital (USD27.3 billion) times the proportion of GA within the investment amounts in private credit and other alternatives at PIGM (75.3%). 28 U.S. insurers complement bank lenders by providing infrastructure projects with capital at different terms. The typical deal size for infrastructure debt at the major U.S. insurance groups ranges between USD25 million and USD300 million, with a long maturity up to 30 years. The maturity structure can be bullet or with amortization 27 , and interest rates can be a fixed or floating rate. The characteristics of insurance liabilities allow insurers to underwrite long-term debts with a fixed rate and bullet maturity, which usually banks are not willing to. 6.4. China The China Banking and Insurance Regulatory Commission (CBIRC) has been keen on promoting infrastructure investments made by Chinese insurers as a means of growing and stabilizing the economy . The infrastructure investment from Chinese insurers dates back to 2006 when the regulator had issued a new policy 28 as a pilot program to allow insurers to invest in state-level infrastructure projects for transportation, communications, energy, municipal projects and environmental protection. Several of the largest Chinese insurers, China Life, Ping An Insurance Group, PICC Property and Casualty and Taikang Life, are reported to have executed their first infrastructure investment that year. It is said that the joint investment from the multiple insurers was a requirement from the CBIRC to reduce an asset concentration risk for each participating insurer. In 2016, the CBIRC took a further step to mobilize insurance funds into infrastructure by amending the previous policy implemented in 2006 and removing the requirement for insurers to obtain regulatory approval before investing in a specific infrastructure project. 29 At the same time, sub sectors of infrastructure where insurers can invest were expanded from the aforementioned five prescribed to broader infrastructure projects. CBIRC’ regulatory action was in alignment with the Chinese government’s “Belt and Road Initiative”, which was announced in 2013 by President Xi Jinping to improve connectivity between China and other countries through infrastructure investment and regional cooperation. In addition to infrastructure debt investments, some Chinese insurers made equity investments in infrastructure – including outside China. For example, China Life participated in a consortium led by TIAA Private Investments and Antarctica Capital to acquire InterPark in 2017, which is the largest parking operator in the U.S. Following the Chinese government and regulator’s initiatives, Chinese insurers’ exposure to infrastructure has reached a high level, compared to other countries. Non-standard debt assets, which are defined in China as not publicly traded and including but not limited to infrastructure, real estate, etc., amount to 12 percent of total assets at China Life – the largest state-owned insurer30 and 13 percent at Ping An Insurance Group as of 2019. Infrastructure debt accounts for 4.5 percent as a percent of total assets at Ping An Insurance Group while transportation and public utilities within non-standard debt assets, which are considered to be infrastructure, comprise 4.0 percent of China Life’s total assets. If equity investments are included, the proportions of infrastructure investments would be higher at both 27 Bullet debt is a debt instrument whose entire principal is repaid at the end of the term while amortized debt is a debt instrument with scheduled periodic payments of both principal and interest. 28 “Measures for pilot management of indirect investment in infrastructure projects by insurance funds”, March 2006. 29 “Measures for the administration of indirect investment of insurance funds in infrastructure projects”, June 2016. 30 China Life is 68.37 percent owned by China Life Insurance (Group) Company, which is a wholly state-owned holding company. 29 insurers. In fact, at the Chinese insurance industry level, insurers had invested RMB1.65 trillion (USD237 billion) in 651 infrastructure projects by the end of 2016 according to the Insurance Asset Management Association of China and that translates into 11 percent of the total assets in the sector at that time. Over one third of these investments were made under the Belt and Road Initiative. Fund managers within insurance groups often play a key role in making and managing infrastructure investments. As a wholly owned subsidiary of China Life Insurance (Group) Company, China Life Investment Holding Company has established several infrastructure equity funds, often in partnership with local governments (Table 10). In 2013, China Life Insurance (Group) Company also established China Life AMP Asset Management Company31 – a joint venture with AMP Capital that is an Australian fund manager. Another eye-catching example is the USD758 million Ping An Global Infrastructure Fund, which was a fund of funds (FoFs) launched in 2019 by China Ping An Insurance Overseas (Holdings) – the main overseas investment platform of Ping An Insurance (Group) Company. Ping An Life provided the FoFs with its existing commitments to infrastructure funds and co-investments as seed assets in addition to making a new commitment to it. While a French investment fund manager, Ardian, supported the transaction as an anchor investor, the FoFs also offered to other third-party investors the opportunities to invest in it. The Ping An group leveraged its internal expertise and capability in the infrastructure space to expand its asset management business. Table 10: Examples of infrastructure equity funds established by China Life Investment Fund Fund Size Name of Fund Period Investment Target (billion) (years) RMB 20 Infrastructure and urban development projects Guangzhou Fund 12 (USD 2.9) in Guangzhou RMB 10 Infrastructure and urban development and Jiading Fund 14 (USD 1.4) construction projects in Jiading District RMB 10 City industry development and urban-rural Suzhou Fund 12 (USD 1.4) integration construction projects in Suzhou RMB 10 Infrastructure, urban development and urban- Wuxi Fund 12 (USD 1.4) rural integration construction projects in Wuxi RMB 1432 Railway construction projects and other Railway Development Fund 15 (USD 2.0) business projects approved by the state Source: Authors’ analysis based of public information from China Life Investment Holding Company 6.5. Japan Japanese insurers have been increasingly investing in infrastructure assets, though their allocations appear to be still insignificant compared to their total assets. Nippon Life, the largest insurer in Japan, commenced project financing loans in FY2013 and underwrote more than JPY220 billion (USD2.0 billion) of such loans on a commitment basis in FY2017 alone. In addition, the insurer’s exposure to infrastructure 31 China Life Insurance (Group) Company holds 85.03% of China Life AMP Asset Management Company’s shares. 32 This refers to the investment amount of China Life only and may differ from the fund size. 30 equity funds is estimated to be around JPY40 billion.33 Although the insurer does not disclose its total exposure to infrastructure assets, it is estimated that infrastructure assets might constitute 1 to 2 percent of its total asset size given the new commitment amount in FY2017. Another major Japanese insurer, Dai- ichi Life, has been investing in project financing loans since the same time as Nippon Life while it had been committing to infrastructure funds since the early 2010s. As of September 2019, Dai-ichi Life’s exposure to project financing loans to renewable energy infrastructure assets stands at JYP120 billion (USD1.1 billion). According to its public disclosure, its total infrastructure exposure is estimated to be more than JPY200 billion (USD1.8 billion), which accounts for less than 1% of its total assets. 34 Infrastructure funds play a vital role for Japanese insurers not only to merely acquire exposure to a specific sector but also to learn and understand a new sector’s characteristics before pursuing direct investment opportunities. This is the case for infrastructure as well. Infrastructure funds had been the focus of Japanese insurers before they started participating in direct project finance, and these funds remain an essential instrument for increasing infrastructure exposure. For instance, Nippon Life reportedly planned to commit around JPY65 billion (USD0.6 billion) to infrastructure equity FoFs within FY2019 ending in March 2020, which are in turn managed by its asset management subsidiaries based in New York and London (where teams of investment professionals are in charge of individual funds selection). Infrastructure funds also shape an essential part of Dai-ichi Life’s infrastructure investment strategy. Alongside investments in existing infrastructure funds in the market, occasionally the insurer actively engages in designing the scheme and strategy of infrastructure funds as an anchor investor together with fund managers. So far, three infrastructure debt funds 35 were co-designed by Dai-ichi Life with fund managers. These funds are open to other institutional investors such as other insurers and pension funds. Box 3: Infrastructure debt funds co-designed by Japanese institutional investors In 2013, Asset Management One Alternative Investments (AMOAI) launched an infrastructure debt fund, Cosmic Blue PF Trust Lily, that invests in overseas project financing loans. Dai-ichi Life co-designed the fund with AMOAI and committed JPY10 billion as an anchor investor. Foreign investment managers usually do not provide infrastructure debt funds investing in overseas projects to which Japanese investors can commit in JPY. In contrast, as currency hedging is provided within the Cosmic Blue PF Trust Lily fund, investors in the fund can pay capital calls and receive dividends in JPY. This aligns with institutional investors’ need to minimize currency risk. 33 Nippon Life’s aggregate exposure to infrastructure equity funds and overseas real estate funds amounts to around JPY200 billion (USD 1.8 billion) at the end of March 2020, roughly 20 percent of which is estimated to be composed of infrastructure equity funds, based on a proportion of planned new commitments to infrastructure equity funds (JPY65 billion (USD0.6 billion)) out of those to both infrastructure equity and overseas real estate funds (JYP350 billion (USD 3.2 billion)) within FY2020. The insurer’s committed amounts (JPY360 billion (USD3.3 billion)) to infrastructure equity and overseas real estate funds at the end of March 2019 were nearly twice an outstanding amount (JPY180 billion (USD 1.7 billion)) as of FY2019. 34 At the end of September 2019, Dai-ichi Life’s total assets amount to JPY36.0 trillion (USD331 billion), excluding separate account. 35 These are Cosmic Blue PF Trust Lily and Cosmic Blue PF Lotus FCP-RAIF managed by Asset Management One Alternative Investments and M&G Infrastructure Loan Fund managed by M&G Investments. 31 Figure 9: Scheme of Cosmic Blue PF Trust Lily Institutional Investors Manager Dai-ichi Life AMOAI Investment Investment management in JPY ... Currency Dividend Currency Hedge Counterparty hedging payment Insurers Banks Infrastructure Debt Fund in JPY Pension funds Cosmic Blue PF Trust lily etc. Investment Principal and interest in foreign currency payment in foreign currency Originate and lend Originate and lend Overseas Project Financing Loans Project #1 Project #2 Project #3 ... Mizuho Bank Banks Source: Authors’ illustration based of Dai-ichi Life’s press release Following the success of the first fund, AMOAI and Dai-ichi Life co-established the second fund with the target size of JPY100 billion (USD0.9 billion) in 2018, JPY20 billion (USD0.2 billion) of which was committed by the insurer. While both first and second funds are similar in terms of a fund structure, the second fund targets not only secondary transactions (i.e. sell down of existing loans sitting on banks’ balance sheet) but primary deals, which could lead to more opportunities investable with the fund. Direct investments, e.g. underwriting project financing loans, have been growing in importance for Japanese insurers in recent years. Nippon Life started investing in project financing loans in FY2013 and established a structured finance department at the beginning of FY2017, aiming to foster investments in overseas project financing loans. The insurer underwrote more than JPY220 billion (USD2.0 billion) in FY2017, JPY120 billion (USD1.1 billion) of which consists of overseas infrastructure projects. At the initial stage of building infrastructure exposure at Dai-ichi Life, the insurer focused on domestic large-scale solar power projects, through both debt and equity, as the Japanese government implemented a feed-in-tariff framework 36 in 2012 to promote renewable energy, which attracted private capital. Since then, the insurer has been gradually expanding from domestic to overseas and diversifying sub-sectors within infrastructure from solar power projects to other renewable energy projects, airports, etc. The Japanese government’s decision to privatize public assets such as airports is also key to create investable infrastructure assets. Japanese insurers have often participated as lenders in airport concessions in recent years (Table 11). 36 The feed-in-tariff framework obliges electric utility companies to buy electricity generated from renewable energy sources at pre-set prices over a fixed period of time. 32 Table 11: Project financing loans for airport concessions that Japanese insurers underwrote Concession Total Amount of Name of Airport Year Participating Insurers Period Syndicated Loans Kansai and Osaka JPY190 billion 2013 44 years Nippon Life international airports (USD1.7 billion) Dai-ichi Life, Fukoku Mutual Life, Meiji JPY170 billion Fukuoka Airport 2018 30 years Yasuda Life (USD1.6 billion) New Chitose Airport Dai-ichi Life, Fukoku Mutual Life, Meiji JPY365 billion 2019 30 years and other six airports Yasuda Life, Nippon Life, Taiyo Life (USD3.4 billion) Source: Authors’ analysis based of public information Decades of experience in providing corporate loans is one of the reasons that Japanese insurers could quickly begin underwriting project financing loans. In general, project finance requires relatively complex analytical skills and sufficient risk management, which are different from those for corporate debt. Nevertheless, knowledge and expertise of existing internal credit teams previously having focused on corporate loans and structured products were leveraged in the project finance space at Japanese insurers. Targeted training for project financing loans can reinforce existing teams in this regard. The expansion of the internal credit team reflects a major trend among Japanese insurers to increase direct investments in infrastructure assets. 6.6. Singapore The Monetary Authority of Singapore (MAS) has been very supportive in creating enabling conditions to facilitate infrastructure investments from institutional investors such as insurance companies and pension funds. The MAS plays critical roles in prudential oversight of financial market players, e.g. banks, insurance companies, capital market intermediaries, financial advisors, and stock exchanges as the central bank and integrated financial regulator in Singapore. It also promotes the development of infrastructure investments, in addition to creating a sound financial sector system. The MAS’s efforts in this space include:  Infrastructure Asia: In 2018, the MAS and Enterprise Singapore, which is a government agency with the mandate of supporting enterprise development, co-established Infrastructure Asia, a technical platform/office to facilitate infrastructure investments in the region through early project scoping, best practice sharing, deal brokering, etc.  Infrastructure debt investment instrument/platform: In 2012, the Singapore government established Clifford Capital Holdings with capital provided by Temasek, which is Singapore’s Sovereign Wealth Fund, together with major global insurers and banks37. Clifford Capital Pte. Ltd (Clifford Capital) as manager38 structured a project finance collateralized loan obligation (CLO) of USD 458 million for institutional investors in 2018. Clifford Capital also established Bayfront Infrastructure Management Pte. Ltd. (BIM) along with the Asian Infrastructure Investment Bank (AIIB) in 2019 to replicate and scale up the previous success of the project finance CLO. BIM is a 37 Clifford Capital Holdings’ shareholders are Temasek (40.5%), Prudential plc (19.9%), DBS, Manulife, SMBC, Standard Chartered (9.9% each). Clifford Capital Pte. Ltd. is a specialist provider of debt financing solutions in the infrastructure and maritime sectors and wholly owned subsidiary of Clifford Capital Holdings. 38 The issuer is Bayfront Infrastructure Capital Pte. Ltd, which is a special purpose vehicle. 33 platform designed to mobilize institutional investors’ capital for infrastructure debt in Asia. BIM will purchase, warehouse and manage mainly brownfield infrastructure loans from financial institutions and development banks. In addition to USD180 million equity provided by Clifford Capital Holdings (UDS126 million) and AIIB (USD54 million), BIM is expected to issue debts up to USD1.8 billion with a guarantee provided by Singapore government, which amounts to USD1.98 billion capitalization in total. Distribution platforms for infrastructure loans warehoused by BIM to institutional investors would be securitizations or other formats. BIM intends to issue packaged securities every 12-15 months and retain 5 to 10% of them as equity cushion.  Creation of investment benchmarks: Since 2016, the MAS has been backing the development of an infrastructure database and benchmarks through a 5-year grant to EDHECinfra, which is a research center on infrastructure at EDHEC Business School. EDHECinfra calculates and provides benchmarks for both debt and equity that cover more than 6,000 infrastructure companies across 25 countries. Box 4: Infrastructure debt investment platforms in Singapore In 2018, Clifford Capital structured a project finance CLO, the issuer of which is Bayfront Infrastructure Capital Pte. Ltd (Figure 10). The portfolio of the CLO was composed of 37 project finance and infrastructure loans across 16 countries in the Asia-Pacific region and the Middle East and acquired from five banks such as DBS, HSBC, MUFG, SMBC and Standard Chartered along with Clifford Capital itself. Figure 10: Structure of Project finance CLO - Bayfront Infrastructure Capital Pte. Ltd Source: Authors’ illustration based on Clifford Capital’s press releases Tranches of the USD458 million CLO were divided into four classes, three of which were floating notes issued for institutional investors (Table 12). The class A, B and C notes are listed on the SGX-ST. 39% of 34 the CLO’s investor base is composed of insurance companies, pension funds and endowment followed by bank treasury (33%), asset managers (21%). Table 12: Key terms of the CLO issued by Bayfront Infrastructure Capital Class Amount Ratings Spread Maturity Date USD mil Moody's Over 6m Libor A 320.6 Aaa 145 bps 1/11/2038 B 72.6 Aa3 195 bps 1/11/2038 Sold to institutional investors C 19 Baa3 315 bps 1/11/2038 Subordinated 45.8 Not rated N.A. 1/11/2038 Retained by Clifford Capital Source: Clifford Capital, Authors 6.7. South Korea South Korean insurers have been keen in increasing infrastructure exposure for years. According to Preqin, among 87 South Korea-based institutions investing or considering investment in infrastructure, insurers account for the largest proportion (30%) of the investor base, followed by banks (21%) and asset managers (16%). 39 South Korean insurers’ allocation to infrastructure assets seems to be above the industry average in other countries. For example, Samsung Life Insurance, which is the largest life insurer with the market share of 22% in the country, has allocated 2.7% of its total assets and plans to invest in four to five infrastructure funds over the following 12 months as of April 2020.40 The second and third largest South Korean life insurers, Hanwha Life Insurance and Kyobo Life Insurance, are more aggressive in pursuing infrastructure investments as infrastructure debts account for 14% and 7% of their operating assets, respectively. Infrastructure investments, both equity and debt, undertaken by South Korean insurers seem to have been mainly through infrastructure funds, including ‘deal-by-deal’ funds. In Korea, it is common to establish a fund to invest in single projects or a specific sub-sector such as power generation, unlike ‘blind- type’ infrastructure funds raised by infrastructure fund managers in other countries. There are three major infrastructure fund managers operating in South Korea: Macquarie Infrastructure and Real Assets (MIRA); KB Asset Management (KBAM); and KDB Infrastructure Investments Asset Management Co. (KIAMCO). MIRA – the asset management arm focusing on infrastructure and real assets of Macquarie Group - took root in the country in the early 2000s, when it established Korean Road Infrastructure Fund in 2002 (renamed later as Macquarie Korea Infrastructure Fund).41 KBAM and KIAMCO are both South Korean fund managers - the former is a subsidiary of the asset management business of KB Financial Group Inc., while the latter was established in 2003 as a subsidiary42 of the state-owned Korea Development Bank (KDB). South Korean insurers have been playing an essential role as investors of these infrastructure funds. Overseas, particularly Australian, infrastructure fund managers have contributed to the development of infrastructure investments in alignment with South Korean institutional investors such as insurers. As mentioned, MIRA has been engaging in the Korean infrastructure sector for decades. It launched 39 https://www.preqin.com/insights/research/blogs/the-evolution-of-south-korea-based-infrastructure-investors 40 https://www.infrastructureinvestor.com/samsung-life-slows-commitment-activity-amid-covid-19/ 41 Macquarie Korea Infrastructure Fund became publicly listed and tradable on the Korea Exchange in 2006. 42 The shareholders consist of KDB (84.16%), Woori Bank (9.90%) and Kyobo Life Insurance (5.94%). 35 several Korea-focused private infrastructure funds, 43 following the first success of Macquarie Korea Infrastructure Fund established in 2002. In 2016, IFM Investors, in partnership with KIAMCO, launched a USD140 million infrastructure debt fund investing in the U.S. and Europe for South Korean investors that include Nonghyup Life Insurane, Mirae Asset Life Insurance and Dongbu Insurance. The Australian fund manager and Samsung Asset Management jointly launched a USD480 million global infrastructure debt fund in 2017, to which Samsung Life Insurance committed USD250 million. The term of the fund is very long with the fund life ending in 2040. Another Australian fund manager, AMP, raised USD6.2 billion for an infrastructure debt fund including USD1.0 billion co-investment rights and USD1.2 billion separate account mandates from global investors. Although the fund was not established for only South Korean investors, USD1.2 billion came from South Korean institutional investors, most of whom are likely insurers. Korean insurers also target direct investments in infrastructure opportunistically. One notable investment executed by Korean insurers is the Seoul Subway Line 9 Section 1 project, the deal size of which amounts to KRW746 billion (USD0.6 billion). The investors in the project include 10 insurers such as Kyobo Life Insurance, Hanwha Life Insurance, Heungkuk Life Insurance, Samsung Life Insurance, Dongbu Insurance, Hanwha General Insurance, Shinhan Life Insurance, LIG Insurance (acquired later by KB Insurance), Nonghyup Life Insurance, Heungkuk Fire & Marine Insurance among others. In recent years, Korean insurers have been expanding their portfolios to overseas infrastructure investments. Samsung Life Insurance and Kyobo Life acquired infrastructure debt of the Indiana Toll Road Concession Company in 2017 while Hanwha Life Insurance and other Korean life and non-life insurers underwrote a 30-year debt on Chicago Parking Meters LLC in 2019. Also, as mentioned in the Europe section, KB Insurance and Samsung Life have participated in the Natixis’s infrastructure co-lending platform to seek overseas infrastructure investments since 2016. Box 5: Infrastructure funds investing in single projects in Korea KB Asset Management (KBAM) is one of the largest infrastructure funds in the world, ranked eighth by aggregate capital raised for the 10 years until 2016 according to Preqin (Table 13). Interestingly, the number of the infrastructure funds that KBAM raised amounts to 42, well above that of global competitors such as MIRA. This is mainly because it is not unusual to establish a fund to invest in a single project or a specific sub-sector in Korea. This is also applicable to KIAMCO. Although KIAMCO did not show up on the aforementioned list of the 10 largest infrastructure fund managers issued by Preqin in 2016, KIAMCO manages 99 infrastructure funds with USD15.9 billion AUM at the end of 2019. The average size of its funds stands at just above USD160 million with the range from USD6.6 million to USD2,116 million. Investors can benefit from investing in funds on a deal by deal basis to look through and perform their own investment judgement on individual projects while utilizing fund managers’ expertise and knowledge in the space. 43 At least three closed-end infrastructure funds were established in South Korea by MIRA, which are composed of Macquarie Korea Opportunities Fund (2005, KRW1.2 trillion (USD1 billion)), Macquarie Korea Opportunities Fund II (2010, KRW1.0 trillion (USD0.9 billion)) and Macquarie Korea Growth Fund (2011, KRW550 billion (USD0.5 billion)). 36 Table 13: 10 largest infrastructure fund managers by capital raised for unlisted infrastructure funds in the 10 years until August 2016 Country of Aggregate Capital No. of Funds Firm Origin Raised (USD billion) Raised Macquarie Infrastructure and Real Assets Australia 29.5 16 (MIRA) Brookfield Asset Management Canada 25.9 6 Global Infrastructure Partners U.S. 13.9 2 EIG Global Energy Partners U.S. 13.2 4 ArcLight Capital Partners U.S. 13.1 4 Energy Capital Partners U.S. 12.4 4 GS Infrastructure Investment Group U.S. 9.8 3 KB Asset Management South Korea 8.8 42 Morgan Stanley Infrastructure U.S. 7.6 2 Alinda Capital Partners U.S. 7.1 2 Source: Preqin, Authors 6.8. South Africa South African insurers have been instrumental in investing in infrastructure for decades as both investor and asset manager. Although data on how much South African insurers have allocated to infrastructure are not available, the potential impact of South African insurers as institutional investor is paramount as the country has one of the highest insurance penetration rates (defined as annual premiums to GDP). In fact, insurance penetration in South Africa stood at 15.8% in 2017 with 9.5% in life, 2.6% in non-life and 3.8% in personal accident and healthcare. Asset managers owned by South African insurers have been playing an essential role in infrastructure investments. Old Mutual, a leading insurer in the country, established the Infrastructural, Developmental and Environmental Assets Managed Fund (IDEAS Managed Fund) in 1999, which is one of the largest domestic infrastructure equity funds for institutional investors in South Africa44. The fund is open-ended and a linked investment policy-based, pooled portfolio product of Old Mutual Life Assurance Company (South Africa). The current fund manager is African Infrastructure Investment Managers (AIIM), 45 which is part of Old Mutual Alternative Investments. AIIM has raised USD2.2 billion via seven infrastructure equity funds46 since its establishment, three of which were fully realized. Another large market player in the industry, Liberty Group, leverages its asset management arm, STANLIB, 47 in this space. STANLIB has launched at least two infrastructure funds, which are composed of STANLIB Infrastructure Private Equity Fund 1 and STANLIB Infrastructure Yield Fund. The former fund had a final close in 2014 with total 44 The fund size is ZAR 13.2 billion (USD 943 million) as of this writing. 45 AIIM was originally established in 2000 as a joint venture between Old Mutual Investment Group and Macquarie Group. The asset manager has been a wholly owned subsidiary of Old Mutual Alternative Investments since it acquired Macquarie’s 50% shareholding in November 2015. 46 These comprise IDEAS Managed Fund, South African Infrastructure Fund, African Infrastructure Investment Fund, Infrastructure Empowerment Fund, Apollo Investment Partnership II, African Infrastructure Investment Fund 2 and African Infrastructure Investment Fund 3. 47 STANLIB was originally founded in 2002 as a joint venture between Standard Bank and Liberty Life. The company has been a wholly owned subsidiary of Liberty Group since 2007. 37 commitments of ZAR1.2 billion (USD86 million), ZAR500 million (USD36 million) of which was provided by Liberty Group, and the latter fund was established in 2016 with total commitments of ZAR1.4 billion (USD100 million). The country’s larger insurers have also provided third-party infrastructure funds with private capital. For instance, Old Mutual and Liberty Group reportedly committed to the Pan African Infrastructure Development Fund established by Harith General Partners in 2007 along with other institutional investors such as the South African Government Employees Pension Fund, the Development Bank of Southern Africa, the African Development Bank among others. The 15-year fund raised USD 630 million from African investors. 7. Lessons learned from experiences so far 7.1. Promotion of infrastructure investments as part of sound asset liability management Insurers’ infrastructure investments should be driven by their asset liability management (ALM) . As described in this paper, one can find many insurers in major markets investing in infrastructure assets even without any capital-related regulatory support (such as lower capital charges). This is mainly because the liabilities of insurers, particularly life insurers, enable and encourage them to invest in long-term, illiquid assets as part of ALM policy. Whilst insurers have held a high volume of long-term government and corporate bonds where such markets exist, the prevailing low interest rate environment has reinforced the search for yield or illiquidity premium that private assets such as infrastructure could offer. To promote infrastructure investments by insurers, several features of such investments need be aligned with their ALM policies. If policy makers or insurance regulators intend to facilitate infrastructure investments in the insurance sector, they need to understand how such investments fit into insurers’ ALM and business models in the countries’ context. Below are major features of infrastructure investments that insurers need to consider:  The first element is to select a particular type of instrument such as equity or debt. Insurers may seek infrastructure debts if they place an emphasis on matching assets and liabilities in terms of duration or cash flow streams (even though it might be refinanced before a maturity, which means insurers still have to take a reinvestment risk). Where insurance products drive insurance companies to focus more on enhancing investment returns, they are more likely to invest in infrastructure equity. Even within equity, an equity investment in a long-term infrastructure project, such as a public-private partnership with promising stable dividends, could be a debt-like investment to some extent, though that instrument itself is classified as equity for accounting purposes. In addition, mezzanine securities such as subordinated debts or preferred equities could be an option to choose. The selection of instrument type may also be affected by regulatory treatment in terms of capital charges.  In the case of infrastructure debt, the type of interest rates, i.e. fixed rates or floating rates, needs to be considered. If insurers focus on duration matching between assets and liabilities in local currencies, fixed-rate infrastructure debt may make sense to invest in as the duration of floating rate debt is essentially close to zero. Nevertheless, floating rate infrastructure debt could 38 be used for return enhancement or could be reasonable if relevant insurance liabilities do not guarantee interest rates (e.g. unit-linked products).  The third element is currency. Where a country has an attractive domestic infrastructure market in terms of investment opportunities and returns, it may be sufficient for the country’s insurers to invest in domestic infrastructure assets only in the local currency. However, this is not always the case, and insurers may prefer to explore overseas infrastructure investment opportunities. In such cases, they need to take currency risk, unless hedging is used, which can jeopardize the sought-after stability of cash flows that infrastructure investments generate as foreign exchange rates fluctuate widely. If insurance companies prefer hedged infrastructure investments, the right hedging instruments and hedge counterparties are needed, which many emerging markets are lacking.  Investment ‘routes’ are the fourth element. Whether an insurer selects a direct investment or a fund investment to get infrastructure exposure depends on its technical capacity and efficiency of investments. If an insurer is equipped with an experienced in-house investment team and a sufficient risk management function and is capable of sourcing, analyzing, executing (and exiting in case of equity) infrastructure deals by itself, direct investments may be an option. Otherwise, investments through private funds or separate accounts appear to be a better option to gain infrastructure exposure efficiently. Even in this case, insurers still need to sophisticate their due diligence skills to select proper fund managers and to monitor their fund portfolios. 7.2. Leveraging insurers’ asset management function to scale up infrastructure investments Making the most of the asset management function within an insurer is key to fostering infrastructure investments at the company-level, and ultimately at the country-level. Insurers naturally develop their asset management function as premiums underwritten need to be invested up front for potential future payouts. While an insurer can have an internal asset management team or an asset management company as a subsidiary, depending on the group structure, larger global insurers often have asset management subsidiaries, which provide asset management service to not only insurers under the same groups but also third-party clients, both institutional and retail. In this regard, insurers play a different role from pension funds, which do not generally have separate asset management businesses. Insurers could reinforce existing investment capacities. Infrastructure investments usually require sophisticated analytical skills for complex modelling and valuation, legal documents, technical aspects, etc. With that in mind, investing in infrastructure funds managed by external managers may be a convenient start for insurers, particularly with less resources and technical capacities, to learn the characteristics of and get exposure to infrastructure assets. Furthermore, insurers could leverage existing investment and assessment teams for other asset classes, e.g. corporate loans/bonds, structured finance, private equity and the like to expand to direct investments. In case an insurer holds an asset management subsidiary, it could launch an infrastructure fund as shown in the above-mentioned examples in Europe, South Africa and China, whether it is an equity fund or debt fund. The parent insurer could provide seed money for the fund and motivate other institutional investors to invest in it. Insurers’ role in infrastructure investments is paramount as they can be a cornerstone to bring in capital from retail and other institutional investors by utilizing their asset management function. 39 Taking full advantage of the insurance business model expands opportunities for gaining exposure to infrastructure. A good example is pension risk transfer transactions between insurers and DB pension schemes. Buy-ins and buy-outs of DB pension schemes, which have been common in UK and the U.S., could be replicated in other markets as well where these pension schemes are remaining. The pension risk transfer transactions can be a catalyst for conservative DB pension schemes’ traditional assets to be mobilized to infrastructure. Also, non-life or reinsurance companies can leverage their underwriting expertise around infrastructure and provide credit risk coverage for capital providers to infrastructure projects, as Swiss Re did through IFC’s MCPP. 7.3. Ecosystem around infrastructure and availabilities of investment opportunities Building an ecosystem around infrastructure finance is paramount. Whilst insurers can play a key role in infrastructure finance, cooperation with other stakeholders is necessary to foster infrastructure investments sustainably. In particular, banks, whether commercial banks or development banks, are equipped with more resources in project financing than insurers and can provide capital and their expertise as underwriter and arranger. That said, banks usually prefer short-term loans unlike long-term investors such as insurers and pension funds. In regard to direct infrastructure debt investments, banks can be an essential source of investment opportunities for institutional investors in not only the primary market but the secondary market in which the banks sell down project financing loans from their balance sheets. The IFC’s MCPP and the Natixis’s infrastructure co-lending platform are concrete examples for creating investment opportunities for insurers in the primary market. While participating investors have a very limited right to decline transactions presented to them under the MCPP, the Natixis’s platform requires investors to conduct their own credit assessment and make investment decisions. Roll-over of project financing loans from banks to insurers through infrastructure funds is another model that targets transactions in the secondary market. This model was observed in some countries such as Japan and Singapore. Whilst both models for the primary and secondary markets could be replicated in developing countries, the model would need to be adjusted, depending on the country’s context in terms of market players’ technical capacities, legal settings, etc. In order to run these models in a sustainable manner, the alignment of interests between banks which originate and provide deals and insurers which invest in them is essential. Thus, banks should have skin in the game whether they originate transactions in the primary market or sell down their infrastructure loans in the secondary market. Insurers always need to be cautious not to take an excessive risk which does not coincide with proper returns and their risk tolerance levels. Insurers could efficiently invest in infrastructure by committing to infrastructure funds which are offered by managers with expertise in the space. Particularly small-mid size insurers, which have difficulty in developing and maintaining internal investment resources including skilled professionals and IT systems, can participate in infrastructure funds operated by seasoned fund managers to accumulate infrastructure exposure. Investors in infrastructure funds could efficiently construct their diversified portfolios as single infrastructure funds typically invests in 10 to 20 infrastructure projects and companies. Committing to multiple infrastructure funds would be more efficient for smaller insurers than sourcing, assessing, investing in and monitoring many individual projects by themselves. In addition, investors could also build understanding of the asset class and co-investment opportunities through investment in funds. On top of infrastructure fund managers, development banks may be able to launch infrastructure funds or investment platforms like MCPP offered by the IFC where appropriate. 40 Governments are in a position to support the development of an infrastructure finance ecosystem. It is not rare that investors claim that there are too few bankable infrastructure projects on the market. In this regard, governments could develop the pipeline of investible projects by privatizing their public infrastructure assets such as airports, toll roads, water facilities among others or incentivizing renewable energy projects through subsidies. Furthermore, it is the government’s role to set up a robust legal framework for infrastructure finance, e.g. laws or regulations on public private partnership, infrastructure funds, project bonds and so on. Another area that governments can support is credit enhancement mechanism. This is exemplified by the Europe 2020 Project Bond Initiative that the EC and the EIB co-facilitated in Europe. During the pilot phase of the program from 2012 to 2015, seven projects benefited from credit enhancement, which amounted to EUR612 million, further resulting in an issuance of more than EUR3.7 billion in bonds. An independent evaluation of the pilot phase conducted by Ernst & Young concluded that the program was useful in facilitating the development of the capital market to finance infrastructure, particularly greenfield projects as well as bringing in new investors. Nevertheless, the first project which was supported by the program was unexpectedly terminated. 48 This demonstrates an operator of a credit enhancement program, whether a central bank or a government, must be highly experienced with enough resources to assess projects. This should be well recognized by countries which intend to establish a similar program. In the case of a government with lower credit worthiness which cannot provide global investors with sufficient credit enhancement, a multilateral development bank or a regional scheme can play a role to attract them by providing credit enhancement programs. 7.4. Data on infrastructure investments and benchmarking Institutional investors such as insurers need robust and comprehensive data to promote infrastructure investments as an asset class that forms a meaningful composition of their total assets. Although investors might be able to invest opportunistically in infrastructure as part of existing asset classes that they recognize in their portfolios, they should understand at least the characteristics of infrastructure such as returns, risks, duration, default rates and recovery rates, which can differ by country, sub-sector, operational type (e.g. PPP), lifecycle (e.g. greenfield or brownfield), underlying instruments (e.g. equity, debt or mezzanine), etc. Beyond that, sophisticated institutional investors may want to set an allocation target to infrastructure specifically in their strategic asset allocation framework, which usually requires consistent historical index data. Nevertheless, such data are not easily available as in most cases, transactions are private, and instruments are not listed. A good example in this field is Singapore’s support in EDHECinfra, which provides an infrastructure database and benchmarks. Although EDHECinfra include 25 countries, few developing countries are in its covered universe. If a government aims for the promotion of infrastructure investments, national supervisors should track and compile data on these investments by establishing reporting standards and requiring supervised institutional investors to provide such data. Unless government understands how much institutional 48 The first project (Castor project) was refinancing for a 30-year concession for construction and operation of an underground gas storage facility in the east coast of Spain. The Spanish government stopped activities at the facility after over 200 minor earthquakes were detected, and the concessionaire of the project requested to relinquish the concession. Senior bonds were fully repaid, and the EIB’s letter of credit was discharged as the Spanish government repaid the concessionaire a corresponding portion of the amount invested. 41 investors have invested in infrastructure assets by investor type such as insurer, pension fund, bank and asset manager, it cannot promote them to invest in it where appropriate. As a starting point, government needs to define what infrastructure is in the country. In many countries, institutional investors have their own definitions for infrastructure, and they sometimes disclose investment activities in regard to infrastructure based on these definitions in their annual reports or presentation materials for investors if they do. Data based on different definitions make aggregation difficult. Although the definition of infrastructure could vary by country to some extent, a common national definition is a precondition to aggregate exposure to it. Based on the common definition for infrastructure within a country, national supervisors can request reporting on infrastructure investments from insurers. Moreover, if a supervisor attempts to treat infrastructure investments differently in its risk-based capital framework (i.e. lower capital charges), a clear definition and data on infrastructure investments are a must in order to prove a rationale of the differentiation of infrastructure investments where appropriate and monitor the validity of such policy after its implementation. 8. Conclusions This paper has reviewed the current stage of infrastructure investments in the insurance sector . Although insurers have been accumulating infrastructure exposure, their asset allocation to infrastructure appears insignificant compared to their total asset size in many countries at this point. Insurers’ allocation to infrastructure stands at 1.5 percent of their assets to infrastructure on average in 2019. They are well behind other institutional investors such as superannuation schemes, sovereign wealth funds, larger public or private pension funds, etc. With that said, how active insurers are in investing in infrastructure varies from one jurisdiction to another. In terms of the volume of asset allocation to infrastructure, China, Korea and the U.S. seem to be standing out in the select countries that this paper examined. Insurers in these countries have allocated their assets to infrastructure well above the aforementioned market average. In terms of underlying instruments, while insurers in Korea and the U.S. are more focused on infrastructure debt such as private placement, Chinese insurers appear to hold meaningful exposure to infrastructure equity in addition to infrastructure debt. Insurers have been promoting infrastructure investments as both asset owners and asset managers because this asset class makes sense from an ALM viewpoint and they can leverage their asset management function. The stable and long-term cash flows of infrastructure assets can naturally align with liabilities of insurers, particularly life insurers. As life insurance products and some specific long-term non-life products often create high switching costs that policyholders have to bear, and thereby insurers’ liabilities are less liquid, they are in a position to take advantage of earning illiquidity premiums that infrastructure assets offer. The prolonged low interest rate environment has escalated such activities in the insurance sector. While infrastructure investments through private funds are well prevailing in the insurance sector, larger insurers with highly skilled and experienced professionals in the infrastructure space often engage in direct investments. Practically, in many insurance groups, asset/fund management companies as subsidiaries play a key role for their parent companies and sometime third-party investors outside the groups. Some fund managers owned by insurers launched infrastructure funds, whether as equity funds or debt funds. Furthermore, insurers can create opportunities to expand the infrastructure market in innovative ways such as pension risk transfer transactions for DB pension schemes and credit risk coverage for capital providers to infrastructure projects. 42 Creating an ecosystem around infrastructure finance and different types of market players is of high importance. The roll-over of project financing loans from banks to insurers through infrastructure funds is a good example that demonstrates how the infrastructure ecosystem performs. Although the way that banks play a role in infrastructure financing can vary by country, it is likely that banks are unwilling to hold long-term project financing loans due to higher capital charges in an RBC framework. Therefore, banks have some incentives to sell down project financing loans once they originated and underwrote these loans. Insurers are in a better position to take and hold these loans sold by banks. Governments and national supervisors can support infrastructure investments in several ways. - Start by setting a clear definition for infrastructure and compiling data in their countries; - Supervisors could justify lower capital charges on infrastructure investments only if their different treatment is evidence-based and makes sense in an RBC framework. Also make sure that the country’s risk-based supervisory framework does not unintendedly hinder infrastructure finance and blended finance tools; - Governments could provide institutional investors with investible infrastructure projects by the privatization of public infrastructure assets as well as a robust legal framework for infrastructure finance; - Government could offer credit enhancement mechanism, such as the Europe 2020 Project Bond Initiative. While this paper mainly examined developed countries, the infrastructure investment models in these countries are replicable in developing countries as well, depending on the countries’ context. As preconditions, the insurance sector in the country should be reasonably developed in terms of premium volume, insurance products (particularly long-term savings products), regulation and supervision (such as a risk-based framework) in order to benefit policyholders as well as meaningfully contribute to reducing the infrastructure investment gap. In addition, other preconditions outside the financial sector include enough bankable projects, a trusted legal framework, etc. Where these preconditions are met, policymakers and insurers in a developing country could pursue the following investment options which would fit in the country’s settings and the companies’ capacity (Table 14) – noting that these options are not mutually exclusive but rather complementary. 43 Table 14: Infrastructure investment models for insurers Analytical Sourcing network Financial market Infrastructure investment models capacity required settings required Relatively Relationship with fund Experienced fund External manager low managers managers Infrastructure fund Sophisticated in- In-house or group Own sourcing network High house or group manager necessary resources Relationship with Well-developed Project bond (publicly issued) Modest arrangers capital market Direct High Relationship with banks Banking sector Roll-over from bank Via partnered Relationship with banks Modest already dominant infrastructure fund and fund managers With investor's own High Co-investment/ investment decision Seasoned Not necessary Co-lending platform Without investor's own arrangers/managers Modest investment decision Sophisticated in- Direct project financing loan/ private placement Own sourcing network High house or group debt necessary resources Source: Authors If insurers in a developing country are well-acquainted with investments in private funds, infrastructure funds managed by external fund managers might be the ‘low-hanging fruit’ to access to infrastructure exposure. While the country may not have local infrastructure fund managers, insurers could partner with foreign managers who are highly experienced in the infrastructure sector - as shown in China and South Korea. Co-lending platforms are an alternative route, including with a development bank playing the role of a co-lending operator. As the experience and expertise is built within an insurance group, its own asset management arm could launch an infrastructure fund for third-party investors as well as its own account. In a developing country where banks are already dominant in infrastructure financing and in a risk- based framework for the banking sector which is pushing them away from long-tenor financing, the roll-over model could work. Depending on the internal technical capacity, an insurer could directly acquire project financing loans from a bank’s balance sheet or partner with an experienced infrastructure fund manager to structure a fund acquiring such loans. A leading local bank with a preference for fee- based business to an asset-intensive business might consider establishing a co-lending platform where institutional investors could find and invest in bankable projects based on their own credit decisions. That said, such a co-lending platform needs sophisticated institutional investors with well-experienced internal teams. Where an appropriate legal framework such as for special purpose vehicles and dispute resolution exists, and an investor base is sufficient, project bonds could also take off for institutional investors, including insurers. Although public projects bonds may require less expertise and resources than direct project financing loans do, investors need a standardized framework for project bonds, including reporting requirements, external credit ratings, etc. Securities regulators can facilitate standardization for project bonds in countries by leveraging an institutional framework for the corporate bond market if it is already in place. 44 Even in a developing country, an insurer could directly invest in individual projects based on its own credit assessment if they have in-house professionals with sufficient experience and expertise in the infrastructure space. As investing in direct project financing loans or private placement debt entails costs to retain specialist staff, probably only larger insurers could take advantage of direct investments. This illustrates the fact that there is no one-size-fits-all model for insurers, whether in a developing or developed country. Figure 11 provides a map that policymakers and insurers could refer to when they consider which models would fit in their technical capacity and infrastructure financial market settings. Figure 11: Infrastructure investment models by technical capacity and infrastructure financing market settings Source: Authors Finally, even though there is still wide infrastructure investment gap in many countries, insurers together with other institutional investors such as pension funds have the potential to make significant contributions. Insurers as asset owners pool premiums collected from individual consumers, business entities and other institutional investors by providing insurance contracts and invest part of them in infrastructure. In addition, insurance groups often have asset/fund management companies as subsidiaries, which play an important role in establishing infrastructure funds offered to other third-party investors. Leveraging insurers’ roles could reinforce the mobilization of private capital. This should be key to the further development of infrastructure investments. 45 Reference Amariei, C. 2020. Asset Allocation in Europe: Reality vs Expectations. https://www.ecmi.eu/sites/default/files/tfaa_final_report_ecmi.pdf Amenc, N., Blanc-Brude, F., Chreng, A., Tran, C. 2017. The rise of “Fake Infra”. EDHEC Infrastructure Institute. https://edhec.infrastructure.institute/wp-content/uploads/2018/08/fakeinfra_EDHEC2017.pdf Carvajal, A. F., Bond, D. L., Adams, D. N. 2017. Promoting the use of capital markets for infrastructure financing: lessons for securities markets regulators in emerging market economies. World Bank Group. https://documents1.worldbank.org/curated/en/672231533669107669/pdf/129287-WP-PUBLIC- PromotingtheUseofCapitalMarketsforInfrastructureFinancing.pdf Convergence. 2018. Who is the private sector? 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MAS 133. https://www.mas.gov.sg/-/media/MAS/Regulations-and-Financial-Stability/Regulations-Guidance-and- Licensing/Insurance/Regulations-Guidance-and-Licensing/Notices/Notices-to-All-Insurers/MAS-Notice- 133_23-Dec-2020---clean.pdf 46 Moore, D., W. 2010. Understanding the duration risk in pension plans: The case for LDI. NEPC. https://cdn2.hubspot.net/hubfs/2529352/Blog/2010_01_nepc_the_case_for_ldi.pdf?t=1486746354842 Preqin. 2016. The $1bn Club: Largest Infrastructure Fund Managers and Investors. https://docs.preqin.com/newsletters/ra/Preqin-RASL-August-16-Feature-One-Billion-Club- Infrastructure.pdf Preqin. 2019. 2019 Preqin Global Infrastructure Report Preqin. 2020. 2020 Preqin Global Infrastructure Report Prudential Financial. 2015. The pension risk transfer market at $260 Billion - innovation, globalization and growth. https://www.institutionalinvestor.com/images/416/The%20Pension%20Risk%20Transfer%20Market%2 0at%20$260%20Billion.pdf Tyson, J. 2018. Private infrastructure financing in developing countries – Five challenges and five solutions. Working paper 536. Overseas Development Institute. https://cdn.odi.org/media/documents/12366.pdf Willis Towers Watson. Global Pension Assets Study 2019. https://www.thinkingaheadinstitute.org/content/uploads/2020/11/GPAS_2019_final-1.pdf World Bank. 2019. Who sponsors infrastructure projects? Disentangling public and private contributions. https://ppi.worldbank.org/content/dam/PPI/documents/SPIReport_2017_small_interactive.pdf 47 Annex While the infrastructure investment gap significantly varies, depending on the wealth of the country, the insurance industry could contribute to filling the gap as insurers play a key role with pension funds as institutional investors. To examine whether insurers have contributed to filling the infrastructure investment gap, we regressed the infrastructure investment gap on insurance penetration by using data across 55 countries. Table 15 displays the summary statistics of the data used. Table 15: Summary Statistics of infrastructure investment gap and insurance penetration by country income class Number of Standard Mean Min Max countries deviation Infrastructure Investment gap (% GDP) HIC 17 0.27 0.22 0.00 0.57 UMIC 16 1.05 0.47 0.16 1.84 LMIC 17 1.70 1.07 0.20 4.01 LIC 5 4.66 1.19 2.66 5.74 Insurance penetration (% GDP) HIC 17 6.48 3.38 1.19 13.17 UMIC 16 2.22 3.45 0.56 5.87 LMIC 17 1.48 1.05 0.13 3.70 LIC 5 0.67 0.53 0.08 1.64 * South Africa is excluded as an outlier in this analysis. Source: Authors’ analysis based on data from GIH and AXCO As the country income class is linked to the level of the infrastructure investment gap, dummy variables were included in the regression to take into account different income classes. Therefore, we estimated the equation shown below: InfraGap = α + β*InsPen + γ*HIC dummy + δ*UMIC dummy + θ*LMIC dummy + ε (1) Where: InfraGap: Infrastructure investment gap ((GIH’s infrastructure investment gap over GDP) * 100 in 2018; InsPen: Insurance penetration ((premiums over GDP) * 100) in 2018; HIC dummy: a dummy variable that is 1 if a country is a HIC and 0 if not; UMIC dummy: a dummy variable that is 1 if a country is an UMIC and 0 if not; LMIC dummy: a dummy variable that is 1 if a country is a LMIC and 0 if not. As our particular interest is lower income countries, we also performed another regression which is focused on upper middle-income, lower middle-income and low-income countries. To control the income levels, GDP per capita in USD was included in the equation. InfraGap = α + β*InsPen + γ*GDPPC + ε (2) 48 Where: GDPPC: GDP Per capita in USD thousands in 2018 The results of the estimated equations are provided in Table 16. Insurance penetration is correlated with the infrastructure investment gap at the statistically significance level of 10 percent while the effects of the dummy variables distinguishing the country income classes are statistically significant at the 1 percent level. In the regression analysis which is focused on lower income countries other than high-income countries, the effect of insurance penetration is strongly correlated with the infrastructure investment gap at the statistically significance level of 1 percent after taking into account GDP per capita representing the wealthiness of the country. Table 16: Results of the estimated regression equation (1) and (2) Dependent HIC UMIC LMIC Constant InsPen GDPPC N R-squared variable dummy dummy dummy 4.72*** -0.09* -3.85*** -3.47*** -2.88*** - (1) InfraGap 55 0.735 (13.82) (-1.88) (-8.03) (-8.74) (-7.41) - 3.29*** -0.47*** - - - -0.15** (2) InfraGap 38 0.404 (9.22) (-2.88) - - - (-2.58) T-values are in parentheses. ***, ** and * denote statistical significance at the 1, 5 and 10 percent level, respectively . We also run these regressions for the life and non-life segments, separately. Infrastructure assets would be a better fit for life insurance than non-life as life insurance contracts are usually longer than non-life. Therefore, a stronger correlation between the infrastructure investment gap and life insurance penetration is expected. Table 17 and Table 18 display the regression results for life and non-life segments, respectively.49 While life penetration was strongly correlated with the infrastructure investment gap, non- life penetration did not show a meaningful correlation with it. Table 17: Results of the estimated regression equation (1) and (2) for the life segment Dependent HIC UMIC LMIC Constant InsPen GDPPC N R-squared variable dummy dummy dummy 5.15*** -0.11* -4.46*** -3.99*** -3.36*** - (1) InfraGap 53 0.738 (12.62) (-1.97) (-9.15) (-8.90) (-7.57) - 2.92*** -0.56*** - - - -0.15*** (2) InfraGap 36 0.373 (8.58) (-2.76) - - - (-2.87) T-values are in parentheses. ***, ** and * denote statistical significance at the 1, 5 and 10 percent level, respectively. Table 18: Results of the estimated regression equation (1) and (2) for the non-life segment Dependent HIC UMIC LMIC Constant InsPen GDPPC N R-squared variable dummy dummy dummy 5.16*** -0.04 -4.76*** -4.06*** -3.42*** - (1) InfraGap 53 0.718 (12.11) (-0.43) (-9.22) (-8.66) (-7.44) - 2.83*** -0.44 - - - -0.15** (2) InfraGap 36 0.253 (6.79) (-1.05) - - - (-2.34) T-values are in parentheses. ***, ** and * denote statistical significance at the 1, 5 and 10 percent level, respectively. 49 Rwanda and Guinea were excluded as separate statistics for each segment were not available. 49