Library: Axa XL – Credit insurance: Unlocking greater financing in emerging markets

Executive summary

Credit insurance can unlock greater financing for critical infrastructure projects and support lending to micro-, small- and medium-sized businesses in emerging markets.

Credit insurance offers an opportunity to reduce poverty

A commonly held belief supposes that many of the world’s problems could be solved “if only we had more money”. While not entirely wrong, this view is largely misplaced. Globally, money in myriad forms is not in short supply. Instead, structural and institutional factors are the more significant impediments to creating the conditions that help people live more comfortably and securely.

In this article, I describe how the insurance industry—namely, the political risk, credit and bond segment —is collaborating with other organisations and institutions to overcome some of these impediments and, by so doing, helping reduce poverty and creating shared prosperity.

A region of contrasts

I am based in Singapore and work with clients and brokers to support cross-border trade and investment in the Asia-Pacific region. Among the noteworthy features of this part of the world are its contrasts. The countries are culturally diverse and have vastly different legal, regulatory, and tax requirements. These multiple contrasts often present complexities and challenges for financial institutions and investors looking to support regional trade and economic development. At the same time, the region’s dynamic growth has created opportunities for higher risk-adjusted returns.

In fact, infrastructure investment in the various Asia-Pacific countries over the past decade has been more significant than in other developing regions. And it shows: visitors from different parts of the world marvel at the gleaming new airports, modern highways and widespread availability of high-speed internet, to cite just a few examples of recent progress. Nonetheless, the infrastructure in most of the region’s developing countries remains far from adequate, and many people lack proper access to basic sanitation, healthcare and electricity. Moreover, the pandemic only magnified these shortcomings and further highlighted the importance of infrastructure development in supporting vulnerable populations.

There are also striking contrasts between the financial markets in the different countries across the region. Places like Australia and Singapore have robust and comprehensive finance sectors that are well-equipped to support local and cross-border trade and development. However, the financial industry is less well-developed in most of the region’s emerging economies, and structural deficiencies are common. In particular, the financial inclusion gap—the inability of individuals and businesses to access useful and affordable financial products and services—remains significant in most emerging market countries. The challenges are particularly acute for women, low-income households and micro-, small and medium-sized enterprises (MSMEs) which can’t easily access whatever credit is available locally.

Mobilising private capital

Limited financial resources are a common denominator for both broad issues—inadequate infrastructure development and the financial inclusion gap. However, as I noted at the outset, the world’s money supply, in all its various forms, isn’t the issue. The Asian Development Bank (ADB) notes, for instance, that only 0.8% of the private capital managed globally by pension funds, sovereign wealth funds, and other institutional investors has been allocated to infrastructure in recent years.

The challenge is how to mobilise more of this private capital since, in many of Asia’s emerging market countries, traditional lending channels have finite capacity and a limited pipeline of properly structured projects. The needs are even more acute currently as countries work to recover from the pandemic.

The International Finance Corporation (IFC)—the World Bank Group division that works with the private sector—has a similar assessment. It points out that since the 2008 global financial crisis, international banks have grown more cautious about financing private-sector projects in emerging market countries, “especially for longer tenors”.

The IFC also notes that “With low yields in developed markets, many institutional investors are seeking higher-yield opportunities … and have exhibited a strong desire for debt instruments from emerging market financial institutions in particular”.

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