Global infrastructure investments are expected to rise to the sum of US$
94 trillion for the period from 2016 to 2040, according to a report from
Oxford Economics from 2017. Already before the financial crisis in 2008, emerging markets have been spending more on infrastructure than mature markets, primarily driven by economic development, urbanisation, changing demographics, the need to protect against rising natural disasters and technological breakthrough.
Asia will account for 54% of these infrastructure investment needs. China is estimated to require 30% of these global infrastructure investments and to spend roughly US$ 1.1 trillion annually going forward to 2040.
China’s infrastructure needs remain enormous
The road and electricity sectors are expected to receive the lion-share of the US$ 26 trillion in investments forecast over the coming 15 years, 40% and 30% respectively. China is also expected to invest heavily in railways to develop a network of high-speed trains connecting its mega-cities.
In the past, particularly in China’s case, the construction sector benefited from fiscal incentives from the Central government to drive economic growth. In addition, the liberalisation of real estate regulation and access to credit boosted the domestic housing market. According to PwC, short to mid-term these underlying parameters in combination with the aforementioned factors to spur infrastructure investments will continue to propel infrastructure projects to new heights.
Surety insurance presents a suitable alternative to bank guarantees
From an insurance point of view, the surety line of business strongly profited from these developments. In fact, in combination with the lines of credit and bonds, the surety line showed a compound annual growth rate of 41%, from 2009 to 2013, according to Aon Benfield. And from early 2015, Chinese primary insurers started writing surety risks on a broad scale, focusing on construction projects.
At present, and as it is in many foreign markets as well, despite surety insurance slowly gaining in acceptance, it is still the commercial banks which dominate the sector by providing bank guarantees. In fact, many clients still confuse bank guarantees with the benefits that a surety insurer might offer. In a one-to- one comparison, banks typically ask for a fully secured basis. The surety insurer, by contrast, analyses the underlying risks and determines the required security/ collateral accordingly.
China’s construction sector, in which some kind of bank guarantee is compulsory – either provided by a bank or an insurer – is dominated by the public sector. Large construction projects executed by the private sector are still rare.
China’s construction market is seen to be keen to tap surety insurers’ capacity
Given the sheer magnitude and the amount of large infrastructure projects envisioned or already underway in China, the central government has to take a lead role in building the recognition for the advantages that surety insurers are able to provide. Furthermore, access to large scale financial capacity is required to secure the execution of these projects and to relieve governments from the risk of a contractor defaulting on its obligations. Regional public-sector players are expected to follow suit. As of today, specifically in the South of China, sureties are used gradually more to provide performance bonds to large construction projects.
On a whole, penetration of surety insurance is still low, but against the backdrop of a compulsory requirement, demand continues to rise steadily. In addition, from an insurer’s point-of-view, the line is attractive as it continues to expand. Within the short period since the liberalisation of the market and the licensing of insurers as surety providers, the line has not been confronted with a substantial downturn and thus remained largely loss free.
