Kathmandu. Insurance companies are playing a new role in increasing the flow of investment in infrastructure and industrial sectors in developing countries. Instead of directly financing projects, insurance companies are now sharing the risk of loans provided by development banks and development assistance agencies.
As a result, the financial capacity of the development banks has increased and they are able to provide more lending. Finally, the flow of investment to roads, factories and other development projects is increasing.
One of the biggest financial challenges facing developing countries today is the long-term financing gap. Achieving the Sustainable Development Goals (SDGs) requires an investment of about $4 trillion each year, but government budgets and the capacity of development agencies are unable to meet this demand. This gap is delaying infrastructure, employment and climate adaptation projects. As a result, the importance of private capital is increasing in the global financial system, especially from the insurance sector to long-term capital.
The global insurance industry is one of the fastest growing sectors in the world. It is expected to reach $9.8 trillion by 2027. However, a significant portion of this capital is still not flowing into the economies of developing countries. These countries are still considered high-risk markets due to high risk, policy bottlenecks, and low project preparation.
In this context, the ‘risk-sharing model’ is emerging. In this model, instead of investing directly in projects, insurance companies bear a portion of the credit risk of loans provided by multilateral development banks and development cooperation institutions. That is, when a development bank provides loans to a country or institution. The insurance company covers a portion of the potential predetermined risk of that loan.
As a result, if the loan is predetermined on a project, the insurance company bears a portion of the loss. This reduces the risk for development banks and allows them to lend to more projects with equal capital. Under this framework, it is observed that an insurance capacity of just $1 can provide development loans of about $2 or more.
According to experts, this model is transforming development finance. In their words, this is not “risk transfer.” But it’s a way to raise capital through risk sharing.” Development banks, insurance companies, and private investors work together to create new economic power structures. A prime example of this model is the International Finance Corporation’s (IFC) Systematic Debt Portfolio Program for Financial Institutions (MCPP FIG). Through this program, insurance companies provide credit protection to the debt portfolios of financial institutions in developing countries. This enables IFC to significantly expand development credit.
In 2023, the framework mobilized about $3.5 billion of credit insurance capacity. That supported an additional credit expansion of about $7 billion over the next few years.
The effects of this system are already beginning to be seen in the economies of developing countries. More than 70 financial institutions have received financing through this framework, and 27 countries have increased investment flows in development projects. Most of them are poor and vulnerable.
Financing for small and medium enterprises, women entrepreneurs and agriculture has increased by 20 to 40 percent. This has boosted the local economy.
However, experts have expressed concern about this model as well. They say political instability, a global economic slowdown and climate risks could affect the stability of the structure in the future. In addition, a key question is to what extent insurance companies are interested in projects with high social impact, even if their long-term profits are low.
Climate finance needs, on the other hand, are estimated to be around $1-2 trillion annually. In many parts of the developing world, financial inclusion rates remain below 50%. This risk-sharing model is, therefore, seen as an essential framework for future development finance.
This risk-sharing model is emerging not just as a form of financial innovation but as a new direction for global development finance. If this model is scaled up over the next 10 years, it could significantly increase investment in infrastructure, industry, and small and medium-sized enterprises in developing countries. However, its long-term success will depend on its ability to manage risk, coordinate policy, and ensure sustainable returns. –Agency
