Insurers have an opportunity to underwrite much-needed private-sector climate resilient and low carbon infrastructure projects in Africa and can even fund such green ventures themselves. How is the market developing? And is there room for African players?
By Oliver Nieburg
The OECD estimates Africa’s finance gap for infrastructure is between $130bn to 170bn annually. Private sector investment will therefore be vital. However, the financial and political risks of funding climate resilient infrastructure projects on the continent remains high, leaving investors doubting if they can recoup a return on investment.
Insurers Munich Re and Allianz from Europe and pan-African player Old Mutual are starting to offer specialized climate insurance products to delimit private sector risk for projects such as sea walls, heat-resistant roads, or hydroelectric dams across Africa. In some cases, insurers are also investing themselves and underwriting the risk for one another.
$130bn to 170bn
Africa’s annual finance gap for infrastructure. Source: OECD
The UNDP and others are now working to build capacity of local African players, so they can underwrite and potentially invest in the continent’s sustainable infrastructure needs.
Underwriting risk to boost private sector investment
The UN’s development programme says insurers can offer infrastructure investors products that hedge political risks or guarantee a minimum kWh output for renewable energy projects. Insurers can even offer project developers premium discounts in exchange for using climate resilient materials that reduce the long-term operational and maintenance costs.
Munich Re’s Africa Energy Guarantee Facility is one such initiative underwriting the political risks of energy projects in Africa. The Facility – in partnership with the European Investment Bank (EIB) and the Africa Trade Insurance Agency – covers sovereign payment risks, contract breaches, currency inconvertibility and civil unrest, among other risks.
“That programme is only available to a limited number of African countries,” said Lauren Carter, an insurance investment advisor for the UNDP. “There’s definitely opportunity for more insurance products of this type.”
A 2018 report from Lloyd’s highlighting innovative financial instruments touted insurance-linked loan packages that would offer a premium discount if climate resilient materials are used or if the engineering design makes the asset more climate resilient. This could limit payout risk for insurers, said Carter.
The UNDP is supporting pilots of such insurance-linked resilience finance models. “Maybe they don’t work, maybe they only work in certain circumstances, but we need all hands-on-deck as the climate emergency is becoming harder to ignore,” said Carter.
What are the investment risks?
Climate resilient infrastructure, unlike energy infrastructure, has struggled historically to generate a revenue model that’s attractive to the private sector because:
- Lack of ROI: Investors often struggle to see a return on investment on a climate resilient project, such as better drainage, which is designed to prevent loss.
- Perceived instability: “When people see the recent unrest in South Africa, they can extrapolate that to the whole continent, even when there may be areas with relative long-term stability,” said UNDP’s Carter.
- Political uncertainty: A sudden change in state leadership could nationalize infrastructure projects. See for instance Section 3.2.1 Political “pet projects” in this OECD report.
- Currency conversion: If the investor funds a 30-year green energy project in US dollars, they will expect to be paid back in dollars. However, local people will pay energy bills in local currency, which can fluctuate substantially over the lifetime of the project and can harm the project’s profitability. Hedging or local currency financing could be a solution but can be expensive.
Can African players compete?
South Africa-based Sanlam told us that most of the underwriting capacity in Africa currently comes from Europe, where players have in-house public infrastructure modelling teams.
The Multilateral Investment Guarantee Agency (MIGA) of the World Bank is another major operator, providing political risk insurance or credit enhancements to foreign investors.
“Investors look at the credit rating of insurers that provide underwriting capacity. The higher the rating the greater the confidence in the insurer and risk resilience of the project,” said Ockert Doyer and Pawan Singh, Co-Portfolio Managers for the Sustainable Infrastructure Fund at Sanlam Investments in a joint statement.
Linet Odera, the UNDP’s Africa Specialist for Insurance and Risk Finance, said appetite is growing among local African players. “Maybe 10-15 years ago there was limited capacity especially in markets outside of South Africa. However, this has since changed for the better.”
The Sanlam Group’s Santam business for example caters to insurance needs for wind, solar or hydro infrastructure, insuring through Sanlam’s underwriting subsidiary Emerald – even though these products are not explicitly labelled ‘green’.
Sanlam also covers Construction All Risks (CAR) and Erection All Risks (EAR) through its specialist underwriter Mirabilis, as well as project liabilities through its niche casualty insurance provider SHA.
The UNDP’s Odera said: “More should be done to bring local insurers to the table when government-to-government infrastructure transactions are signed to gradually grow capacity and technical know-how.” This could be via a prescribed level of local insurance cover built into contracts. “This would then allow portions if not all performance/guarantee bonds being taken up by local insurers,” she said.
“If [African insurers] don’t get the opportunity to compete to offer
their services, then it remains just a dream.”
Linet Odera, UNDP’s Africa Specialist for Insurance and Risk Finance
Many African insurers’ balance sheets are not currently strong enough to provide specialized political risk insurance and credit enhancement products to multi-million, multi-decade infrastructure projects. But African insurers could offer other products related to the construction, such as environmental liability against weather impacting the construction or protection for contractor worker injuries or equipment damage.
“But if they don’t get the opportunity to compete to offer their services, then it remains just a dream,” said Odera.
However, a recent surge in M&A activity may improve African insurers’ capabilities.
African Insurance: M&A activity
– Sunu Group (Senegal) acquires Allianz Africa subsidiaries in Benin, Burkina Faso, Mali and Togo.
– Momentum Metropolitan (South Africa), acquires Alexander Forbes’ non-life activities for $130M and later adds Forbes’ Namibia operations.
– Jubilee Holding Limited, East Africa’s largest insurance group, enters a strategic partnership on non-life activity in Kenya, Tanzania, Uganda, Burundi and Mauritius with international player Allianz.
– Sanlam (South Africa) takes full ownership of Nigerian financial group FBN Holdings. Sanlam is now Africa’s largest insurer after acquiring Morocco Saham Finances in three deals from 2016 to 2018.
African insurers with the capacity
- Nairobi-headquartered African Trade Insurance Agency (ATI) is already active in green infrastructure underwriting, providing insurance protection against political risk for the projects.
- Nigeria-based Africa Re and Kenya-based Zep Re are others touted by the UNDP as insurers with the capabilities to underwrite green infrastructure.
A funding role
Aside from underwriting, insurers as the world’s largest pool of capital along with pension funds, are also being backed as key investors in green infrastructure.
“Some of the climate funds [such as Green Climate Fund which has around a $9bn capitalization] do have a lot of money, but the need is so much higher,” said UNDP’s Carter.
Climate change adaption funding gap per year by 2030 in developing countries. Source: World Bank.
The UNDP believes long-term green infrastructure investments are aligned with similar long-term products in insurers’ portfolios, such as life insurance. “They can also get stable and predictable cash flows and an illiquidity premium,” said Carter.
Cape Town-based Old Mutual is already investing, while over the last seven years, fellow South Africa insurer Sanlam has pumped more than R6 billion ($390M) into 25 green infrastructure projects, mostly in South Africa. The Group has launched the Sanlam Investments Sustainable Infrastructure Fund, focussed on investments in infrastructure projects across sectors including energy, ICT, water and transport.
Doyer and Singh of Sanlam said the group would continue to explore investments across the continent, adding that allocating capital to sustainable infrastructure projects will support Africa’s post-COVID-19 rebuild.
The Group envisages that Africa’s electrification and the rate of renewable energy adoption will influence the insurance market’s continued participation in green projects.
“Given the relative costs of classic versus renewable energy, it is foreseeable that coal, for example, will remain an important part of the power mix on the continent, however because of the relative low levels of development, Africa is well positioned to leapfrog into renewables,” said Doyer and Singh.
A powerful signal to foreign investors
Infrastructure investments account for only 2-3% of global insurers $33 trillion portfolios at present, typically sitting in the ‘alternative asset category’ alongside private equity, hedge funds and real estate. However, insurers have an investment appetite for infrastructure around 5-6%, according to the UNDP. The main problem is identifying a pipeline of investable projects, especially ones that are low-carbon and climate resilient, said the UNDP’s Carter.
But she added: “A lot of times the regulator where they are domiciled, may not even allow insurers to invest in infrastructure, they may see that as too risky.” Insurers are sometimes only permitted to invest in government bonds or other conservative investments.
But the UNDP is hoping to engage with governments to enable more direct infrastructure investment from local insurers. “So local insurers in, for example Kenya, can invest in their own infrastructure in local currency financing. This sends a powerful signal to foreign investors looking to co-invest,” said Carter.