Library : NAIC – Can Insurance Company Investments Help Fill the Infrastructure Gap?

Executive summary :

Insurance is key to infrastructure

Infrastructure is the compendium of permanent facilities and structures required to engineer a robust economy that is resilient and growing and for a well-functioning society. The failure to maintain and expand Infrastructure with adequate investments eventually erodes productivity, resilience, and growth potential. Unfortunately, while progress has been made in the past few years, a substantial gap exists between the infrastructure investment necessary to support continued economic vigour and growth and what is currently financed and projected to be financed in the near term. In the United States, the funding gap is estimated by the American Society of Civil Engineers (ASCE) to be nearly $2.6 trillion over the next 10 years. Further, at current rates of U.S. infrastructure investment, the ASCE projects this gap to cost the United States $10 trillion in aggregate forgone gross domestic product, more than 3 million jobs, and $2.4 trillion in exports through 2039.

Returns are attractive for insurers

Following the 2008 financial crisis, the supply of long-term U.S. infrastructure funding increasingly fell to institutional investors, such as insurance companies, pension funds, sovereign wealth funds, and other institutions that must maintain long-term investments to minimise duration gaps and interest-rate-risk. Infrastructure projects are usually collateralised, offering additional protection against default risk, and they typically generate relatively predictable and stable cash flows over the long term while minimising potential capital erosion, which well-suits the needs of these institutions.

Been there and got the T-shirt

Insurance companies have long been a significant presence in infrastructure financing. For example, an earlier assessment, had estimated U.S. insurers holding as of Dec. 31, 2015 approximately $223 billion in U.S. securities, $198 billion in general obligation bonds, $296 billion of municipal revenue bonds, and $780 billion of corporate bonds in the following broad infrastructure sectors: utilities; natural resources; communications; transportation; social infrastructure and power generation.1 While these values were not meant to be definitive, nor were they generated from a precise definition of what infrastructure is (as we do here), the total amount highlights the potential presence of insurance companies as an institutional investor in this asset class.

The whole nine yards

This study is a joint effort of the National Association of Insurance Commissioners’ (NAIC) Center for Insurance Policy & Research (CIPR) and Capital Markets Bureau to establish a baseline understanding of infrastructure investment by the insurance industry (size, performance, etc.) and to subsequently investigate the industry’s potential for closing the infrastructure gap. Importantly, we first define specifically what we mean by “economic infrastructure,” and we then size the market for financial investments in economic infrastructure. We then provide empirical evidence on the credit performance and risk return profile of these financial investments in infrastructure and calculate the current financial exposure to infrastructure within the U.S. insurance industry. Finally, we discuss existing and potential regulatory treatment of financial investments in U.S. infrastructure by the NAIC.

Our infrastructure definition focuses on economic infrastructure and includes six broad sectors: transportation, broadband, telecommunications, waste management, power and energy, and water and water resources. Social infrastructure and emerging infrastructure are not included in this study and may be considered in a future report.

Financial investments in infrastructure are made through debt, both corporate and municipal; equity; and concession structures—an increasingly popular approach— such as public-private partnership (PPP, or P3) model. For debt securities, we include corporate debt, structured debt, and municipal bonds. For equity, we include private equity funds, joint ventures, and direct purchases as well as common and preferred stock.

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