Swiss Re’s Scotti: Industry key to “de-risking” infrastructure projects in emerging markets

Capital "doesn't flow fast enough into infrastructure projects in emerging markets," said Veronica Scotti, chair of Swiss Re’s Public Sector Solutions, citing the “perception of risk” as the key contributing factor.

However, given the unique work which Scotti’s department does with nation states and other stakeholders to make them more comfortable with the risk, capital could become more accessible.

Speaking to The Insurer TV in the latest episode of Close Quarter, Scotti identified a “substantial funding gap” in infrastructure projects in emerging economies, correlated with the lack of insurance penetration in these regions.

“By 2040, we know that we need about $80trn to spend on infrastructure globally to be able to meet up with general economic growth and demand – but infrastructure investments are extremely expensive, and there are experiences around the world that tell us that after a loss, even 40 to 50 percent of the losses incurred could be related to infrastructure,” she explained.

“I believe that in order for us to be able to successfully scale and maintain momentum in infrastructure investment, we really need to be much more effective in how we deploy insurance.

“We can make a big difference as a de-risking mechanism to help increase the investability and the bankability of these projects,” Scotti added.

Scotti's prime example of this is Nepalese hydropower. As she explains, Nepal is a country where, due to its economic development, demand for energy is growing.

Although a region blessed with a lot of hydropower, it is also a region which suffers from a lot of earthquakes, in addition to an undeveloped insurance industry.

Originally, international investors had been keen to fund Nepal’s hydropower station; however, Scotti said that this "investment was put on hold" once investors considered the risk of earthquakes paired with the country's underdeveloped insurance industry.

That was until Swiss Re Public Sector Solutions decided to intercede, where, as Scotti pus it, they managed to put a "multi-year cover in place, that really protects the development of this plan from cradle all the way to becoming operational."

Another way in which Swiss Re is derisking the construction of large-scale infrastructure projects can be seen in their involvement with Indian transport initiatives. Swiss Re has come on board to identify sector-specific risks, which has increased the flow of capital into the project, as private investors are less fearful of uninsured perils derailing initiatives.

"The raison d’être"

However, Scotti made clear that the most fruitful utilisation of public-private partnerships (PPPs) within insurance was mitigation against climate change

Quantifying the scale of capital needed to help communities successfully adapt to climate change, Scotti pointed to a recent Swiss Re study.

"In the next 10 years, about $100bn each year, for this decade, per annum, will be required to create the conditions under which we can start to adapt to natural catastrophes,” she said. “And that's down to only a handful of sectors: infrastructure, agriculture, and real estate.”

Scotti said PPPs are essential for providing the foundations for this capital to be raised on, in order to help societies manage the increasing risk associated with extreme weather.

Further education for governments

Scotti said the mission of public-sector solutions was not limited to just raising capital; for her, it also involves educating governments on the risks that "they are carrying", and how these could impede them from "developing a sustainable, wealthy economy."

But Scotti said her job is far from over in this regard –with fewer than five countries in the world with a designated risk officer on staff in a government position, there is still long way to travel.

However, countries look increasingly to insurance as a tool to build their policies around. In Scotti’s view, the industry in on the edge of becoming one of the go-to tools for governments wishing to build socially resilient economies.

As an example, Scotti pointed to Swiss Re’s increasing involvement with governments: from designing a parametric insurance cover for a coral reef in Mexico, which pays out to local businesses affected by its erosion through tropical storms; to the case of the cat bond that it helped bring to market, which provided a total of $630 million dollars for earthquake cover to the government of Chile.

"I think there's a juncture in the next 10 years where, as an industry, if we can corral around this need for deeper understanding of risks, but also help create multi-year programs for better preparedness and a dialogue that allows us to continuously adapt our solutions, I think we can create tremendous resilience and with real credibility."

Watch the 22-minute video interview with Swiss Re’s Veronica Scotti to hear more on: