Asean insurance sector’s pivotal role in infrastructure financing

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Insurance, known for its long-term nature, plays an essential role in supporting and sustaining economic growth in the Asean region. Beyond the traditional protection products, the insurance industry provides capital with a long-term investment horizon and generates opportunities for public-private partnerships in infrastructure projects that are instrumental to economic growth.
Strategically located between China and India with 10 member states, the Asean Economic Community (AEC) is one of the world’s most dynamic and fast-growing regions with continued economic growth expected. With an aggregate GDP of US$2.6 trillion in 2014, it is the third largest economy in Asia and the seventh largest in the world. The region’s GDP is forecasted to expand over $5.4 trillion by 2030.
As the world’s third largest market in Asia with 622 million people in 2014, Asean’s population is expected to reach 721 million by 2030. The region is seeing a significant demand for infrastructure with a massive gap between infrastructure capacity and demand projected in the region by 2020. The Asian Development Bank estimates that Asean will need to invest up to $8 trillion in infrastructure from 2010 to 2020, as well as an annual investment of $60 billion for road, rail, power, water and other infrastructure.
Despite the efforts in Asean countries to promote infrastructure for development with government budgeted projects, a significant infrastructure financing gap has emerged due to the challenges and impediments in the public financing space.
With the long-term nature of life insurance, retirement savings and pension annuities, the insurance industry is well positioned to participate in infrastructure financing of Private-Public Partnership (PPP) projects, given its need to match long-term liabilities with long-term assets. There are unique opportunities for the industry to play a pivotal role in contributing private investment and sector expertise in long-term PPP infrastructure projects.
Insurance premiums in Asean have experienced exponential growth between 2004 and 2014 at an average annual rate of 13% – almost three times faster than the global average. The fast-growing middle class and ageing population in the region, coupled with anticipated economic growth, suggest that the industry will see increasing premium income which will require sound investment opportunities and can be deployed for infrastructure financing.
In the current volatile and low-yield environment, infrastructure investments allow Asean’s insurers to generate attractive long-term returns. The ability to generate stable cash flows also makes it captivating. Demand for infrastructure tends to be stable and mostly immune to economic headwinds. The low volatility in usage demand offers the benefit of risk mitigation. Through infrastructure investments, insurers can seek a competitive risk-adjusted return on equity, achieve long-term risk exposure that may match for their long-term liabilities and diversify their investment portfolios. The industry can also deepen understanding of markets involved in the infrastructure projects, which may in turn create opportunities for their bottom-line growth through new businesses developments.
Despite the potential benefits of infrastructure investing, the partial implementation of risk-based capital requirements in some Asean countries has posed challenges to the insurance industry’s participation in infrastructure financing. The proposed increased amount of capital for equity allocations is likely to make insurance business more capital-intensive, discouraging insurers to invest in growth assets such as infrastructure investments.
Modern and efficient water, power and transport infrastructure are  essential for the functioning of society. Visionary policymakers in the region also must understand that private investments from insurance industry in PPP infrastructure projects are similarly integral to sustainable growth. They have to address existing challenges, including the lack of vibrant domestic bond markets for long-term financing, complex regulatory regime and framework for PPP infrastructure projects, lengthy government decision-making process, investment restrictions on insurance companies, and a lack of investible projects and availability of project information, etc. – all factors that are dampening the injection of capital from the insurance industry in the region.
Asean’s policy makers should proactively nurture a favourable environment to encourage the insurance industry to be a greater contributor to infrastructure investment through various measures, including strengthening regulatory and legal regimes, establishing well-defined PPP policies with clear accountability, relaxing capital controls and investment rules that impede withdrawal, developing the public sector’s capability in effectively and efficiently managing infrastructure projects, and offering favourable accounting treatment and tax incentives.
With a vision to foster greater partnership among insurance players, regulators and governments, Asean Insurance Council believes that the insurance industry is well positioned to play a more prominent role in advancing economic and societal developments within the region through strategic participation in PPPs. It is crucial to continue open, transparent and constructive dialogue among all key stakeholders. Through close collaboration to drive and sustain long-term growth, together we can make Asean a more integrated region with greater connectivity, for the good of the broader population in the region – today and for many more generations to come.

The 2nd Asean Insurance Summit 2016 takes place November 23, 2016 in Yogyakarta, Indonesia. For more information, visit http://aseaninsurancesummit.com/