Last Updated 8/27/2019
Issue: “Infrastructure” encompasses projects long financed by governments and private projects long financed by banks. Government financed infrastructure projects are subject to known legal, financing and regulatory paradigms, while private infrastructure is subject to privately developed arrangements. An insurer can get infrastructure exposure by buying municipal bonds or bank loans. However, if it wants to invest in a project directly, it has to find the projects because there is no market mechanism to provide the type of information typically provided by market mechanisms. Information used typically includes available investments, credit risk of the projects, documentation standards and pricing.
Infrastructure has two other characteristics important for this discussion. One is the project has to be built before cash flow for repayment exists. The other is infrastructure projects are large scale, regional/national, complex and individually unique. This all means infrastructure projects require significant time and resources to find and study before risks and potential rewards can be understood.
Background: A number of factors have contributed to insurers’ interest in direct investments in infrastructure. New bank regulations are likely to cause banks to significantly decrease infrastructure lending while government infrastructure funding is facing significant politically headwinds. At the same time, infrastructure projects are ideal investments for an insurer: they lead to long lived assets; generate predictable revenue over their life and are highly illiquid providing a better return and reducing reinvestment risk. Each stage of an infrastructure project (i.e., planning and design, approval and construction, operation and then maintenance); involves different risks and attracts investors that want that risk. It isn’t clear that insurers want or need new regulatory paradigms to have exposures to the different project stage risk profiles or that they want a paradigm so an insurer or group of insurers could invest in all of the stages of a given project.
Status: In 2019, CIPR along with the NAIC’s Securities Valuation Office, Structured Securities Group, and Capital Markets Bureau are working together to craft an Infrastructure white paper for the insurance industry. A request for information was released at the Summer 2019 National Meeting in New York City. The white paper will seek to develop a better understanding of infrastructure investments and the dynamic of that market as it relates to the U.S. insurance industry as an institutional investor. The white paper is expected to be released in the spring of 2020.
Insurance companies already invest indirectly in infrastructure through bonds. While direct investment in infrastructure provides several advantages, it also requires a unique analytical construct. In 2017, the NAIC Securities Valuation Office (SVO) worked with the ACLI to create transparency standards, analytical criteria and methodology for power generation and renewable energy projects. It continues to be involved in a number of related initiatives. Additionally, the NAIC Valuation of Securities (E) Task Force evaluates potential impediments to insurer investment in infrastructure. Although no impediments have yet been identified, the Task Force stands ready to address concerns as they arise.
Committees Active on This Topic
Infrastructure Investment and the Insurance Industry
August 2017, CIPR Newsletter
Remarks by ACLI to the NAIC Valuation of Securities Task Force
August 2016, ACLI
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Sr. Counsel, Investment Analysis Office