Texel is a global insurance broker that provides credit and political risk insurance products. They specialize in non-payment insurance, a specific form of insurance often used by DFIs, MDBs, commercial banks, and private sector debt investors that protects against the risk of non-payment of principal from borrowers.
Effectively, non-payment insurance allows insured parties to transfer to the insurer the risk of borrower default leading to loss. The transfer of risk happens in the form of a guarantee or insurance contract, with the insurer representing lower credit risk than the underlying obligor; the median sovereign risk rating of developing countries is S&P-equivalent “B+”, therefore obligor risk is often very high. Texel’s clients include commercial and investment banks, and increasingly development institutions (Multilateral Development Banks (MDBs) and Development Finance Institutions (DFIs)) who use non-payment insurance to increase their capacity to take on more risk and optimize their balance sheets.
Since the size of the SDG investment gap in developing countries is very large relative to existing cross-border investment flows (the OECD estimates that the annual SDG financing gap has risen from $2.5 trillion to $4.2 trillion, due to pandemic-related financing need), products such as non-payment insurance present an opportunity for the insurance market to step-in to diversify sources of investment, and increase the capacity of originating MDBs, DFIs, and banks to underwrite higher levels of investment.
We spoke to Simon Bessant, Global Head of Insurance at Texel, about their work with development institutions, the incentives for private insurance companies to participate in emerging markets and work with MDBs and DFIs, and what Texel can do to support development institutions and private investors channel greater financing towards emerging markets.
What is your experience working with DFIs to date?
DFIs have been a growing component of our client base. We currently represent a number of development banks, and they are also an attractive and growing part of an insurer’s portfolio, especially if you’re looking at emerging markets. There is increasing recognition of the potential of risk transfer products, such as non-payment insurance, in mobilizing private capital. This new awareness has been led by institutions like the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), and this has subsequently taken off across the various MDBs and their loan portfolios around the world.
Historically, we have not seen much investment from insurance companies in blended finance transactions. What are the benefits for private insurance companies to participate in emerging markets, and to work with MDBs and DFIs?
Insurers particularly see the benefit of supporting DFIs when participating in emerging market lending, where you have to put your capacity behind loans that could suffer from concerns around local currency risk, or political risk. For these reasons, insurers are less comfortable supporting commercial lenders in certain countries, so if they want to support infrastructure development in many emerging markets, the only way to do that from a risk perspective is to support development banks. Development banks also generally look to share risk in an equitable manner, so rather than looking to use the insurance market to provide 90% of the risk protection, they’re often looking to the insurance market to cover 30-50%.
Additionally, there is a greater awareness from the insurance market that they need to support the sustainable development goals (SDGs); including energy transition, global infrastructure development, reducing the trade finance deficit, and working out how to provide access and financial inclusion in many countries. Doing that behind a development bank is often how they can achieve some of those goals in a commercially sustainable fashion.
Finally, insurers have also experienced incredibly low loss history with development banks. They’re seen as having patient capital. They’re long-term partners and accept that there will be bumps in the road, which means insurance isn’t the first thing they’ll turn to on day two of a default. The insurers are certainly there to pay a claim, which is backed up by the data on the non-payment insurance policy claims to regulated finance institutions (see figure 1), but if all parties agree that more time is needed, then the insurers are often incentivized to push out tenor to mitigate the potential loss and that’s more likely to happen when working with a development institution.
Figure 1: Non-payment insurance market strength
How can Texel support development banks and private investors channel greater financing towards emerging markets?
From a development bank perspective, Texel is here to take them through from understanding the product, what it is and what it can do (e.g. increase gross lending exposures, reduce risk weighted assets held against loans, mobilize private capital into development focused lending), to understanding the context of the market, and guide their usage of the product so that they can reach the much more experienced level of insurance purchasing that some of the larger development banks are already involved in.
When it comes to private investors, we focus on demonstrating how the insurance product can provide them with the enhancement they require to achieve the rating they need from a risk perspective, and from a capital perspective. Many investors need certain levels of rating thresholds to avoid holding excess capital against an underlying asset, and insurance can be used to elevate an asset to investment grade. Tying together the power of the private investors with the risk-taking capabilities of the insurance market can really help to provide a new form of investment into SDG or climate focused development finance. Texel is at the forefront of shaping these relationships, as we understand the various issues faced by investors looking at obtaining Solvency II treatment for these assets and insurers concerned about how the documentation might need to evolve to meet the investor’s needs.
How do you see Texel’s blended finance activities evolving in the future?
The bottom line is that Texel and the wider insurance market would like to be involved in more blended finance transactions. There is an understanding that blending concessional donor capital with commercial private capital will allow scale, and insurers want to be part of that, and they also want to do more with development institutions in emerging markets infrastructure. So, they recognize what they need to do, and they understand the risk sharing capacity of concessional financing; however, providing a third party with blanket underwriting support subject to transactions meeting certain eligibility criteria and then automatically being insured, is something that currently is at the more frontier end of their risk appetite. However, insurers do have the capacity and capability to look at statistical information on Loss Given Defaults, Probability of Defaults, Exposure at Default etc. and underwrite portfolios with a more actuarial focus. Utilizing this portfolio underwriting approach and combining this with concessional and private investor appetites could be incredibly powerful in scaling up blended financing structures to support climate focused lending.
To continue to develop our market and probably slightly controversially, I believe the insurers need to consider removing the veil of confidentiality that often surrounds the product. When working with development banks for certain larger transactions the insurers could recognize their mobilization role and involve themselves in the structure with this enhancement being clear and transparent to the Borrower. There is a fear for insurers that the moral hazard of knowing that something is insured, could lead to someone making different payment choices when debt comes up for servicing. However, that maybe less relevant when the borrower faces a development institution. You can also structurally ensure that no tranche is disproportionately affected by a failure to pay. ATI and other multilateral insurers are comfortable with this and hopefully the private insurance market will move towards this in partnership with the development finance community over the coming years.
At the end of the day, I believe that insurers being able to talk about their mobilization efforts and allowing publicity around the product and recognition around what they’re doing would only bring them more business rather than lead to more losses. If people knew more about what the insurance product was doing, then it would grow in usage and relevance and thus mobilize more development lending. Development banks use many billions of private insurance every year to provide larger levels of financing to their members and member countries, but they could do more, and Texel is here to help them do that. We feel that there’s a huge opportunity here and the relationship between insurers and development institutions can only grow, and the more that is known about it, the more it is discussed, the more efficient it can be.