october 2016 china’s belt & road initiative, and the

3 Foreword4 Executivesummary5 Belt&Road–an

overview12 Theinfrastructure

gapandtradeinB&Rcountries

17 ImpactonChina’scommercialinsurancemarket

21 SupportingB&Rwitheffectiverisktransfer

26 Conclusion27 Appendix

October2016China’s Belt & Road Initiative, and the impact on commercial insurance

Swiss Re Corporate Solutions Insurance China

Swiss Re Economic Research & Consulting

Swiss ReChina’sBelt&RoadInitiative,andtheimpactoncommercialinsurance,2016 3

Foreword

Theworldischangingrapidly.WestronglybelievethatChina’sfuturedependsonboldstrategyandrobustexecution.Tothisend,the“BeltandRoadInitiative”,or“OneBeltOneRoad”asarticulatedbyPresidentXi,willbeakeydriverofChina’sdevelopmentinthenext10yearsandbeyond.

Sinceinceptionoftheideain2013,greatprogresshasbeenmade.However,somequestionwhetherthemomentumcanbesustained,oreveniftheideafitswithChinesevalues.Inourview,itisimportanttorecognisethatincontrasttoothernational-levelstrategyprogramswhichmostlyfollowthefive-yearplanningcycle,fromthestartOneBeltOneRoadhasbeenalong-termandglobalambition.Theprogramwillentailmanyyearsofintra-regionalandcross-countrycooperation,andwillfostersustainableeconomicgrowthandinternationalprosperity.

Theinvestmentsthatarepartoftheprogramwillnotbeone-off,butwillbesustainedovermanyyears.Thisissomethingtobecelebrated.Chinadoesnotexistinisolationandcannotworkeverythingoutbyitself.Itshouldcooperatewithothernations,andonewayistoengageanddeepenourrelationshipswithcountriesalongthepathoftheoldSilkRoadcreatedthousandsofyearsago.

AgainstthebackdropofChina’sambitiontobringtheworldclosertogether,thispaperaddressestheoverallscopeoftheBelt&RoadInitiative,includingtheimplicationsfortheinsuranceindustry.Wewouldliketothankourexpertsinboththeresearchandbusinessareasfortheircontribution.Theanalysisisbasednotonlyondata,butalsoknowledge.Similarly,thevisionisbasednotonlyonprojectionsbutalsoreal-worldexperience.Wehopeyoufindthepaperilluminatingandlookforwardtohavingthechancetodiscussthisinspiringtopicwithyou.

Jingwei Jia Clarence WongCEOChina ChiefEconomist,HeadER&C–AsiaSwissReCorporateSolutions SwissRe

4 Swiss ReChina’sBelt&RoadInitiative,andtheimpactoncommercialinsurance,2016

Executivesummary

TheChineseeconomyhasexpandedrapidlyoverthelast30years,withannualgrossdomesticproduct(GDP)growthaveragingabout10%.Growthhasslowedinmorerecentyearsduetoweakerdemandglobally.Chinaremainsvulnerabletoexternalshocksbecauseofitsrelianceoninvestmentandnetexports,andthishaspromptedthegovernmenttotryrebalancetheeconomytoamoredomestic-consumptiongrowthmodel.

Atthesametime,fosteringimprovedintegrationintotheworldeconomyhasbecomeanimportantitemonthegovernment’sgrowthagenda.Asignificantmilestonewastheformallaunchof“OneBelt,OneRoad”(referredtointhisreportastheBeltandRoad(B&R)Initiative)inMarch2015.Theaimofthisverylarge-scaleprogramistoimproveconnectivityacrossChinaandwiththerestofEurasia,throughbuildinganetworkofinfrastructurefacilitiesandexpandingexisting(andancient)traderoutes.

LackofinfrastructurehasheldbackdevelopmentinmanyB&Rcountries.ThisreportestimatesthatthetotalinfrastructuregapintheB&RregionwillbearoundUSD20trillionintheperiod2015–2030,withChinaitselfaccountingformorethanathirdoftheexpectedshortfall.Mostinfrastructureshortagesareintheareasofpower,transport,waterandsanitation,telecommunicationsandotherinfrastructure.ManygovernmentsofB&Rcountrieshaveexistingplanstoupgradetheirinfrastructurefacilitiestoimprovegrowthpotential.TheB&Rprogramisawelcomesupporttosuchaspirations,andshouldalsoenablemoreefficientcoordinationandfinancingofrelatedconstructionprojects.

B&Risexpectedtotriggeranewwaveofconstructionactivitiesandtradeliberalisation,whichinturnwillpresentopportunitiesforChineseenterprisesandcontractors,andalsoinsurers.B&RprojectsalreadyannouncedasofJuly2016haveatotalvalueofuptoUSD1.2trillion,andtheinsurancepremiumpotentialcomingoutofthoseprojectsisestimatedtobeUSD7billion.ThisreportestimatesthatUSD5.5billionofthosepremiumscouldgotoChineseinsurers.And,theB&RconstructionprojectsthatmaybeforthcomingintheperiodAugust2016to2030,couldgenerateanotherestimatedUSD27billioninpremiums,ofwhichUSD16billioncouldbeforChineseinsurers.Themainbeneficiariesoftheseprojectswillbeengineering,propertyandmarineinsurers.Furthermore,increasedtradearisingfromB&RcouldbringanadditionalUSD1.5billioninpremiumsforChineseinsurancecompaniesby2030,ofwhichanestimatedUSD600millionwouldbetradecreditpremiums.Thusintotal,isitprojectedthatB&RcouldboostcommercialinsurancepremiumsinChinabyUSD23billionintheperiod2015to2030.

ChinesefirmstakingpartinB&Rwillfaceanewriskenvironmentinthosecountriesinwhichtheyinvest,aswilltheinsurerssupportingtheiroutward-lookingendeavours.Withintheconfinesoflocalregulations,China’sinsurersshoulddeterminethebeststrategytobuildalong-termpresenceinthenewmarkets,suchasbygoingintopartnershipwithahost-locationentity.Theyshouldalsounderstandtheirclients’needsanddevelopproductsaccordingly.Forinstance,therearemanycaseswhereenterpriseshaveengineeringinsurancefortheconstructionphaseoftheirprojects,butthesepoliciesexcludecoverfornaturaldisasters.Also,increasinglyclientswanttailored,“all-in-one”typeinsurancepackages,notseparatepoliciesfordifferentlinesofbusiness.Customisedsolutionscanprovidemoreefficientriskprotectionandminimisethecostofinsuranceforclients.

GrowthinChinahasbeenverystrong,buttheeconomyremainsvulnerabletoexternalshocks.

ThegovernmentwantstoincreaseChina’sintegrationwiththeworldeconomy.B&Rwillbeakeydriverofthis.

InfrastructurefacilitieswillbeacentralpillarofB&R…

…triggeringawaveofconstructionandtradeliberalisation,andalsodemandforinsurance.CommercialinsurersinChinacouldgainanadditionalUSD23billioninpremiumsin2015–2030.

Tomaximisetheopportunity,China’sinsurersshouldlooktobuildalong-termpresenceinotherB&Rcountries,andfocusontheirclients’needs.


Belt&Road–anoverview

TheriseofChina

Chinaopenedupitseconomytoforeigntradeandinvestmentinthelate1970sandhasexperiencedrapiddevelopmentsince,withannualrealGDPgrowthaveragingaround10%throughto2015(seeFigure1).Thiswaslargelybasedoninwardforeigndirectinvestment(FDI),anexpandingmanufacturingsector,risingcapitalformationandproductivity,increasingadoptionoftechnologyandfurtherliberalisationofChina’sfinancialservicessector.1

F=forecasts

Source:NationalBureauofStatisticsofChina,SwissReEconomicResearch&Consulting.

Morerecently,theChineseeconomyhasslowedasaresultofweakerexternaldemandandinvestmentgrowth.Notwithstandingthestrongperformanceofthelast30years,theeconomyremainsvulnerabletoexternalshocksgivenitsrelianceoninvestmentandexports.Thishasledgovernmenttoseektorebalancetheeconomyfromanexport-andinvestment-orientedtoamoreconsumption-drivenmodel.Thenewnormalislower,butmorestableandsustainablegrowth.

Atthesametime,thegovernmentisencouragingChineseenterprisestoinvestoverseas,partlytoacquirenewtechnologiesandsecuresuppliesofrawmaterials.Accordingly,outwarddirectinvestment(ODI)fromChinahasexpandedrapidly,byacompoundannualgrowthrate(CAGR)of22.7%between2006and2015.Outboundinvestmentsareestimatedtohavesurpassedinboundflowsforthefirsttimein2015,makingChinaanetcapitalexporterandinvestor.2Thestrongmomentumiscontinuing.Forinstance,non-financialoutboundinvestmentroseby61.8%year-on-year(yoy)toUSD102.8billionintheperiodJanuarytoJuly2016.3 Incomparison,FDIintoChinahasbeenslowing,andinthefirstsevenmonthsof2016itwasupjust4.3%yoytoUSD77.1billion.TheslowdownisinlinewiththeweakergrowthintheChineseeconomyitself,andalsoincreasingforeigninvestorinterestinotheremergingandfrontiermarkets.

1 K.H.Zhang,Foreign Direct Investment and Economic Growth in China: A Panel Data Study for 1992–2004,UniversityofIllinois,2006,https://faculty.washington.edu/karyiu/confer/beijing06/papers/zhang.pdf

2 Estimatefor2015isbasedonpublisheddatafornon-financialODIanditshistoricalshareintotalODI.3 Summary of China’s non-financial overseas direct investment in the first half of 2016,Ministryof

CommerceforthePeople’sRepublicofChina,http://www.mofcom.gov.cn/article/tongjiziliao/dgzz/201607/20160701363623.shtml

China’sannualgrowthhasaveragedaround10%sincethelate1970s.

Figure 1 ChinarealGDPgrowth,1979–2030F,%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2029

F20

27F

2025

F20

23F

2021

F20

19F

2017

F20

1520

1320

1120

09

2007

200

520

03

2001

199

919

9719

95

1993

1991

198

919

8719

85

198

319

8119

79

Theeconomyisrebalancingfromexport-andinvestment-ledgrowthtomoreweightondomesticconsumption...

…andoflate,Chinahasbecomeanetexporterofcapitalandinvestment.


Belt & Road – an overview

E=estimate,*actualnon-financialODIandutilisedFDIforJanuary–July2016.

Note:Fortheyears2001-2005,ODIisnon-financialoutboundinvestment;post2005thenumbersarenon-financialandfinancialoutboundinvestment.The2015estimateisbasedonnon-financialODIanditshistoricalshareintotalODI.“UtilisedFDI”isthepartofcontractualFDIactuallyrealised.Source:CEIC,MinistryofCommerce,SwissReEconomicResearchandConsulting.

TheBeltandRoadInitiative

BackgroundImprovedintegrationwiththeworldeconomyandfinancialmarketsisfastbecomingacentralitemonChina’sgrowthagenda.AnimportantmilestonewasreachedwiththelaunchoftheBeltandRoadInitiative,alsoknownasthe“OneBelt,OneRoad”inMarch2015.InitiallyproposedbyPresidentXiJinpingin2013,theplanhastwocomponents:TheSilkRoadEconomicBelt(theBelt)anda21stCenturyMaritimeSilkRoad(theRoad).4TheBeltwilllinkChinawithEuropethroughcentralandwesternAsia.TheRoadwillconnectChinawithSoutheastAsia,AfricaandEurope.NeithertheBeltnortheRoadfollowaspecificroute.TheyservemoreasaroadmapforhowChinacanfurtherintegrateintotheworldeconomy.Table1detailstheevolutionofB&R. 567

Time MilestoneSep–Oct 2013 ChinesePresidentXiJinpingproposesB&Rforthefirsttimeduringvisits

toKazakhstanandIndonesia.

Oct 2014 21Asiancountries5signaninitialbatchofMemorandumofUnderstandings(MoUs)on“EstablishinganAsianInfrastructureInvestmentBank”.

Nov 2014 TheSilkRoadFundisestablished.

Mar 2015 TheB&Ractionplan,Visions and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road (Visions and Actions)6ispublishedbymajorChineseofficialministries.

Dec 2015 TheAsianInfrastructureInvestmentBankislaunchedwith57foundingmembers.7

Source:XinhuaFinanceAgency;SwissReEconomicResearch&Consulting.

4 TheoldSilkRoadwasanancienttradenetworkconnectingChinatotheMediterraneanSea5 The21countriesareBangladesh,Brunei,Cambodia,China,India,Kazakhstan,Kuwait,Laos,Malaysia,

Mongolia,Myanmar,Nepal,Oman,Pakistan,thePhilippines,Qatar,Singapore,SriLanka,Thailand,UzbekistanandVietnam.

6 Visions and Actions on Jointly Building Silk Road Economic Belt and 21st-Century Maritime Silk Road,NationalDevelopmentandReformCommission,MinistryofForeignAffairs,andMinistryofCommerceofthePeople’sRepublicofChina,withStateCouncilauthorization,March2015

7 Forthelistofallfoundingmembers,pleaseseeAsianInfrastructureInvestmentBank’swebsite:http://www.aiib.org/html/aboutus/introduction/Membership/?show=0

Figure 2 China’sODIandutilisedFDI,2001–2016

0

30

60

90

120

150

2016

*

2015

E

2014

2013

2012

2011

2010

200

9

200

8

2007

200

6

200

5

200

4

200

3

200

2

2001

CAGR (2006–2015) 22.7%

USD bn

Utilised FDIODI

B&RisastrategicprogramtoimproveChina’seconomicandfinancialintegrationwiththerestoftheworld.

Table 1 KeymilestonesinthedevelopmentofB&R


B&Risalong-termprogramtodeepencollaborationamongparticipatingcountries,andtodrivesustainablegrowth.Someinitialplanshavealreadybeenrolledoutandactioned,butthereisstillmuchtocome.AccordingtointerviewswithgovernmentalbodiesinChinathathavecontributedtotheplanningofB&R,theentireprogramcouldcontinueforupto30years.Withnospecifictimelinedefined,thisreportfocusesonthepossibleimpactsoftheprogramonChinaandtheinsuranceindustryintheperiod2015–2030.

Six international economic corridors and one maritime silk roadB&RisintendedtoimproveconnectivityinAsiaandEurope,andwithAfrica,throughanetworkofinfrastructureprojectsandexpansionofexistingtraderoutes(seeFigure3).TheBeltcomponentoftheinitiativespanssixinternationaleconomiccorridorsacrossEurasia,andtheRoadisamaritimeroutelinkingAsia,AfricaandEurope.Together,theBeltandtheRoadwillconnect65countries8accountingfor62%ofworld’spopulationand30%ofglobalGDP.9

ThesixinternationaleconomiccorridorsoftheBeltare:

(1)The China-Mongolia-Russia Economic Corridorthattargetscross-nationalcooperationamongChina,RussiaandMongoliaforimprovedrailandroadconnectivity,andtomakecustomsclearanceproceduresmoreefficient.

(2)The New Eurasia Land Bridge Economic Corridor.ThisconnectsChinawithEuropethroughcentralandwesternAsia.CurrentlyarailrouterunsfromLianyunganginChina’sJiangsuprovincethroughAlashankouinXinjiang,allthewaytoRotterdamintheNetherlands.10ToextendthelinetomorecoastalportsinEurope,anewLandBridgepassingthroughKazakhstan,Russia,BelarusandPolandisplanned.

(3)The China-Central Asia-West Asia Economic Corridor,linkingXinjiangwiththeMediterraneancoastandtheArabianPeninsulathrougharailnetworkacrosscentralandwesternAsia.ThecorridorwillconnectXinjiangwithKazakhstan,Kyrgyzstan,Tajikistan,UzbekistanandTurkmenistanincentralAsia,andgoontoIranandTurkey.

(4)The China-Pakistan Economic CorridorthatconnectsXinjiangtoPakistan’sGwadarPort.ChinaandPakistanhavemappedoutalong-termcooperationplantobuildroads,railways,oilandnaturalgaspipelines,andanopticfibrenetworkalongthecorridor.

(5)The China-Indochina Peninsula Economic Corridor.TheintentionistobuildanextensivenetworkofinfrastructuretostrengthencooperationbetweenChinaandthefivecountriesintheIndochinaPeninsula.11Atpresent,ninecross-borderroadsareunderconstruction,andsomeprojectshavealreadybeencompleted.12

8 P.Gong,Z.Song,andW.Liu,“CommoditystructureoftradebetweenChinaandcountriesintheBeltandRoadInitiative”,Progress in Geography,May2015.

9 Asof2014,estimatedbySwissReEconomicResearch&ConsultingusingdatafromtheWorldBank.PleaseseeAppendixformoredetails.

10TherailwayroutewithinChinacomprisestheLanzhou-LianyungangRailwayandtheLanzhou-XinjiangRailway,andrunsthrougheastern,centralandwesternChina.

11 ThefivecountriesareVietnam,Myanmar,Thailand,CambodiaandLaos.12Theninecross-borderroadsare:(1)theChina(Kunming)-Vietnam(Hanoi–HoChiMinhCity)highway;

(2)theChina(Kunming)-Myanmarhighway;(3)theChina(Kunming)-Myanmar-Thailand(Bangkok)highway;(4)theChina(Kunming)-Laos-Thailand(Bangkok)highway;(5)theLaos-Thailandhighway;(6)theVietnam-Laos-Thailandhighway;(7)theMyanmar-Thailand-Vietnamhighway:(8)theMyanmar-Thailand-Cambodia-Vietnamhighway;and(9)theLaos-Thailand-Cambodiahighway.Someprojectsarealreadycomplete,suchasahighwayinGuangxitotheFriendshipGateandDongxingPort.AndGuangxiNanninghasdirectflightconnectionstoBeijing,Nanning,HanoiandothercitiesinSoutheastAsia.HKTDC Research,15October2015,http://beltandroad.hktdc.com/tc/market-analyses/details.aspx?ID=471558

Itisalong-termprogramthatcouldrunformanydecades.

B&RwillincreaseintegrationandconnectivityacrossEurasiaandAfrica.



(6)The Bangladesh-China-India-Myanmar Economic Corridorforclosercooperationamongthefournamedcountriesinareassuchastransportinfrastructure,investmentandculturalexchange.

Source:Visions & Actions,SwissReGEOteam,SwissReEconomicResearch&Consulting.

Financing B&R B&Risaverylarge-scaleprogramwithhugefundingrequirements.AccordingtotheMinistryofCommerce,sinceinceptionoftheprogramtoJuly2016,China’stotalODIinB&RcountrieshasreachedUSD51.1billion.13Intheperiod2015and2030,cumulativeoverseasinvestmentfromChinaintotheB&RcountriescouldtopUSD1.0trillion.14Therewillbecentralandlocalgovernmentfunding,butChinahasalsoindicatedthatamixoftraditionalandinnovativechannelswillbeneededtofinancethevastinvestmentamountsinvolved.WhileChina-ledmultilateralfinancialinstitutionsandpolicybanksaresettopowertheoverallprogram,commercialloans,equityfinancing,insurancecapitalandavarietyofprivateandsocialfundingsourceswilllikelyplayanimportantrolealso.

ChinahasbeenaleadingpartnerintheestablishmentofanumberofmultinationalfinancialinstitutionssetuptosupportinfrastructureconstructioninAsia(seeTable2).TheAsianInfrastructureInvestmentBank(AIIB)isthelargestsuchbodyandwillbecomeakeyfundingsourceforinfrastructureprogramsinAsia,includingB&Rprojectsthatarealignedwithitsownobjectives.SinceitsestablishmentinDecember2015,theAIIBhasalreadyannouncedaco-financingprojectwiththe

13NewsconferenceheldbytheMinistryofCommerce,availableonwww.mofcom.gov.cn,http://www.mofcom.gov.cn/xwfbh/20160817.shtml

14EstimatedbySwissReEconomicResearch&Consulting.PleaseseeAppendixformoredetails.

Figure 3 Thesixinternationaleconomiccorridorsandonemaritimesilkroad

China’scumulativeODIinB&RprojectscouldtopUSD1.0trillionby2030.

TheAIIBwassetuptosupportinfrastructureprojectsinAsia.


AsiaDevelopmentBank(ADB)fortheconstructionofamotorwayinPakistan,andalsofinancingsupportforfourotherB&RprojectsinIndonesia,Bangladesh,PakistanandTajikistantotalingUSD500million.15

TheSilkRoadFund(SRF)isafacilitydedicatedtoeconomicandsocialdevelopmentin,andimprovedconnectivityamong,B&Rcountries.Positionedasanopen-endedfund,theSRFcanmakeuseofequity,debt,loansandotherdiversifiedinvestmentandfinancingmethodstosupportB&Rprojects.Itcouldalsobecomeamodelofpublic-privatecooperation,asprivatesectoragentsseemmorewillingtoparticipateinprojectsthathavealreadysecuredSRFfunding.16InApril2015,theSRFtogetherwithChinaThreeGorgesCorporation(CTG)andPakistan,announcedafirstprojectforinvestment,namelyconstructionoftheKarothydropowerplantinPakistan.17

TheBRICSNewDevelopmentBank(NDB)isanothernewmultilateralfinancialinstitution.ThreeofitsfivefoundingmembersareB&Rcountries,andtherewilllikelybesynergiesbetweenB&RprojectsandthosesupportedbytheBRICSNDB.TheBRICSNDB’sfirstbatchofloanswereissuedinApril2016,withrepaymentduein12–20years.TwoofthefourrecipientprojectsareinB&Rcountries:combinedloansofUSD331millionhavebeenissuedtosupportrenewableelectricitygenerationprojectsinChinaandIndia.18

Note:SAFE=StateAdministrationofForeignExchange,CIC=ChinaInvestmentCorporation,EXIM=Export-ImportBankofChina,CDB=ChinaDevelopmentBank.

Source:AIIB,SRFandBRICSNDBwebsites;SwissReEconomicResearch&Consulting.

15Z.Yangpeng,“AIIBtoexplorecooperationtofinanceinvestmentprojects”,Chinadaily.com.cn,9May2016,http://www.chinadaily.com.cn/business/2016–05/09/content_25146411.htm;and“AIIB:SlumupgradingprojectinIndonesiaiseligibleforaloanofUSD216.5million”,Sin Chew Daily,28June2016,http://indonesia.sinchew.com.my/node/61229?tid=5

16 “TheSilkRoadFundwillleveragethe“OneBeltOneRoad”strategyasanenginewithregisteredcapitalofCNY60billion”,www.custeel.net,28February2015,http://www.custeel.com/shouye/common/viewArticle.jsp?group=1017&articleID=4107645

17 Q&A about the Silk Road Fund’s First Project Investment,SilkRoadFund,20April2015,http://www.silkroadfund.com.cn/enweb/23809/23812/23942/index.html

18Thesetwoprojectsinclude(1)aUSD-250-millionloantoIndia’sCanaraBanktosupport500megawattsofrenewableenergycapacity;and(2)anUSD-81-millionloantoChina’sShanghaiLingangHongboNewEnergyDevelopmentCo.tofund100megawattsofrooftopsolarpowergeneration.AnotherUSD300millionhasbeencreditedtoBrazil’sBancoNacionaldeDesenvolvimentoEconomicoeSocialtosupport600megawattsofrenewableenergycapacity,andUSD180milliontoSouthAfrica’sEskomHoldingsSOCLtdforpowerlinesthatcantransmit670megawattsandtransform500megawattsofrenewableenergygeneration.See“CooperatingwithADB,AIIB’sfirstfinancingprojectslaunchedinPakistan”,www.zaobao.com,4May2016,http://beltandroad.zaobao.com/beltandroad/news/story20160504–612978and“ThefirstshowforBRICSbank:TotalloansofUSD811millionannouncedtosupportgreenenergyprojectinChina,India,BrazilandSouthAfrica”,www.gov.cn,22April2016,http://www.gov.cn/xinwen/2016-04/22/content_5066701.htm

TheSRFwillsupportB&Rbepromotingpublic-privatesectorcooperation.

TheBRICSNDBfocusesonrenewableenergyprojectswhichhavesynergieswithB&Robjectives.

Table 2 Quasi-sovereignfinancialinstitutionsfundingforB&R

Institution MissionLaunch year

Founding members Size Initial funding source

Asia Infrastructure Investment Bank

ToprovidefinancialsupportforinfrastructuredevelopmentandregionalconnectivityinAsia.

2015 57members AuthorisedcapitalUSD100bn;SubscribedcapitalUSD86bnasofJuly2016

Capitalsubscribedbymembers(ChinacommittedinitialinvestmentofUSD50bn).

Silk Road Fund TopromoteeconomicandsocialdevelopmentandinterconnectionamongB&Rcountries.

2014 SAFE,CIC,EXIM,CDB

FirstphaseUSD10bn,plannedcapitalUSD40bn

SAFE:USD6.5bnCIC:USD1.5bnEXIM:USD1.5bnCDB:USD0.5bn

BRICS New Development Bank

ToprovideeasierfundingandsettlementswithinBRICSmembercountriesforinfrastructureconstructionandsustainabledevelopment.

2015 Brazil,Russia,India,China,SouthAfrica(BRICS)

InitialauthorisedcapitalUSD100bn,initialcapitalcontributionUSD50bn

EachBRICScountryUSD10bn



MajorfinancingisexpectedtocomefrompolicybankssuchasChinaDevelopmentBank(CDB)andExport-ImportBankofChina(EximBank),whichtypicallyofferfavourablefundingratesforstrategicnationalprojects.19Atthesametime,commercialbanksinChinahavesteppedupparticipationinB&Ropportunities.Bytheendof2015,20ninebankshadanetworkof56branchesin24B&Rcountries.21 Comparedtostate-ownedcapital,theprivatesectorhastheadvantageofmoreflexibilityintermsofprojectselection,riskpreferenceandinvestmenthorizons.RegulationshavealsoevolvedtoeasemarketaccessforbothforeignanddomesticprivatecapitalparticipatinginB&RprojectsinChina.Since2014,China’sMarketAccessNegativeListSystem22 hasbeenextendedtomoreregions,indicatingarelaxationofgovernmentcontroloverinvestmentdecisionsandeasieraccesstoprivatecapital.23ByAugust2015,anumberofprivateequityfundsinvestinginB&RprojectshadbeenestablishedinChina.24

InsurancecapitalwillalsoplayanimportantroleinfacilitatingB&Rprojects.Chinahasahugeinsurancecapitalbase.Attheendof2015,totalassetsinChina’sinsurancesectorreachedoverCNY12trillion(USD1.8trillion).25ThesectorwillhavethecapacitytoinvestmorethananestimatedCNY24trillion(USD3.7trillion)ininfrastructureandrealestateoverthenext20years.Toencouragesuchspending,inJuly2015theChinaInsuranceRegulatoryCommission(CIRC)relaxedrulesandexpandedthescopeofprojectsforinsurerstoinvestin.Insurersnolongerneedregulatoryapprovaltoinvestininfrastructure.Subsequently,theChinaInsuranceInvestmentFund(CIIF)wassetupinJanuary2016asadirectoverseasinvestmentvehicleingovernment-sponsorednationalstrategicprojects.ThefundtargetsCNY40billion(USD6.2trillion)ininitialcapital,risingtoaprojectedCNY300billion(USD46.2billion)eventually.26

19By2015,CDBhadlentUSD156billionworthofloanstoB&Rcountries,withUSD111billionloansstilloutstanding.EximBankhasfinancedmorethan1000projectsin49B&Rcountries,andhasmorethanUSD80billionloansoutstanding.Thoughmainlyfundedbydomesticbondissues,policybanksarestartingtoseekalternativefundingsources.InOctober2015,CDBcompleteditsfirst-everoverseasbondissuetosupportB&Rprojects.Theissuewaswellreceived.

20“Chinesebanksestablished1298branchesoverseascovering59countriesandregions”,China News,24June2016,http://www.chinanews.com/cj/2016/06-24/7916536.shtml

21Forexamplesee“InterviewwithCCB’sCEOWangHongzhang:InfrastructureconstructioninducedbyOneBeltOneRoadneedsanintegratedfinancialservicessupport”,Xin Hua,26April2016,http://news.xinhuanet.com/world/2016-04/26/c_1118744533.htm;China Construction Bank and IE Singapore sign first-ever MOU to finance “One Belt, One Road” infrastructure projects in Southeast Asia”,InternationalEnterpriseSingapore,25April2016;CCB (Asia) issued the first “Maritime Silk Road” offshore renminbi bond,CCB(Asia),23November2015,http://www.asia.ccb.com/hongkong/doc/about_us/newsroom/151123-maritime-silk-road-bonds.pdf;and“CITICBankprovidesfinancingsupportofCNY400billiontoboostOneBeltOneRoadstrategy”,Yicai.com,24June2015,http://www.yicai.com/news/4636760.html.

22Forsectorsandbusinessesthatareoff-limitstoforeigninvestment,andisanamendmentoftheexistinginvestment-approvalmethodforcategoriesthatare“encouraged”,“prohibited”,or“restricted”.

23L.Lan,“Negativelistforforeigninvestmentexpandedtoinlandregions”, www.chinadaily.com.cn,31October2015,”http://www.chinadaily.com.cn/business/2015-10/31/content_22332771.htm

24“OneBeltOneRoadinvestmentresearchreportreleased,PEinstitutionsexploreB&Ropportunities,PPPopensupnewchannelsforfinancing”,ZERO2IPO Research,31August2015,http://research.pedaily.cn/201508/20150831387733.shtml

25“China’sinsuranceassetsreachedCNY12trillionin2015,rankedthethirdinglobalmarket”,China News,27January2016,http://www.chinanews.com/fortune/2016/01-27/7735012.shtml;USD/CNYexchangerateof6.5asoftheendof2015.

26AStateCouncilexecutivemeetingdecidedtoestablishaCNY-300-billioninsuranceinvestmentfundtofocusonmajorinfrastructureprojectsandB&Rinternationalcapacitycooperationprojects.See“ChinaInsuranceInvestmentFundwasestablished,aninjectionofCNY300billionwillinvestintherealeconomy”,www.yicai.com,24June2015,http://www.yicai.com/news/4636740.html

Chinesepolicybanks,commercialbanksandprivatecapitalwillplayanactiveroleinthefinancingofB&Rprojects…

…aswillinsurancecapital.


B&R and internationalisation of the renminbiB&Randrenminbiinternationalisationgohandinhand.Drivingincreasedcross-bordertransactionsoutofandintoChina,B&Rwillboosttheuseoftherenminbiintradeandinvestment.27Inturn,renminbiinternationalisationwillfacilitatefreerflowofgoods,servicesandcapitalintheregion.ChinahasclosetradeandfinancialtieswiththeB&Reconomies,whichtogetheraccountfor26.8%ofitstotalexports.28 Thatproportionisexpectedtoincreasetoonethirdby2025.29Therenminbiwillalsoplayabiggerroleinfinancinginfrastructureprojects.Chineseoutwardinvestorswanttoissuebothforeigncurrencyandrenminbibondstomeettheirfinancingneedsinothermarkets.AnexampleofafacilitatingtooltothisendistheBankofChina’s“BOCOne-Belt-One-RoadRenminbi”(BOCOBORR)index,launchedinDecember2015tohelpfirmsmonitorforeignexchangemovementsandtopromotegreateruseoftherenminbiinB&Rprojects.30

27 Renminbiinternationalisationhasacceleratedsince2009whenChinaestablishedthe“dim-sum”bondmarketandexpandedtheCross-BorderTradeRenminbiSettlementPilotProject,whichhelpedestablishpoolsofoffshorerenminbiliquidity.In2014,yuan-denominatedcross-bordertradesettlementvolumesroseby41.6%toCNY6.55trillion.Asofend-2014,therenminbiwasoneofthetop5worldpaymentcurrenciesbyvalue.SeeR.Aitken,“ChineseRMB‘Catching’JapaneseYenFastInTop-5PaymentCurrencies”,Forbes,30January2015,http://www.forbes.com/sites/rogeraitken/2015/01/30/chinese-rmb-catching-japanese-yen-fast-in-top-5-payment-currencies-where-next/#2f799b3662ef

28Basedon2015Chinaexports,CEIC.29“ZhouLiqun(ChairmanoftheboardofsupervisorsofChinaExport&CreditInsuranceCorporation

(SINOSURE)):inthenext10years,atotalinvestmentofUSD1.6trillionisexpectedtobeinducedbyOneBeltOneRoad”,Sina Finance,30January2015,http://finance.sina.com.cn/hy/20150130/104021437014.shtml

30Bank of China published the B&R RMB exchange rate index (BOC OBORR),BankofChina,2February2016,http://www.boc.cn/aboutboc/bi1/201602/t20160202_6330693.html

B&Randinternationalisationoftherenminbiaremutuallysupportive.


TheinfrastructuregapandtradeinB&Rcountries

InfrastructuredemandintheB&Rregion

LackofinfrastructurehasbeenastumblingblockfordevelopmentinmanyB&Rcountries.ImplementationoftheB&RInitiativeandtheinvestmentinassociatedprojectswillhelpclosetheregion’sexisting(significant)infrastructuregap.Atthesametime,theconstructionprojectswillpresentopportunitiesforthecommercialinsurancesector.

ThetotalinfrastructuregapinB&RcountriescouldtopUSD20trillionbetween2015and2030,31orabout2.9%oftheB&Rregion’sGDP.32Abreakdownofinfrastructuredemandshowsalargepartofthegapisintheareasofpower,transport,water,sanitation,telecomsandothers(seeFigure4).B&Rwillfacilitatecooperationamongtheparticipatingcountriesin,andalsofinancingof,relatedprojectstoclosetheinfrastructuregapmoreefficiently.Manycountriesalreadyhaveambitiousconstructionplansinplace.ThoseonthedrawingboardwillbereviewedwithrespecttotheirrelevanceandpotentialcontributiontotheoverallB&Rprogram.

Note:Otherinfrastructureincludespublicbuildingsandlogisticsandwarehouses.

Source:ADBInstitute,SwissReEconomicResearchandConsulting.

Closingtheinfrastructuregap

B&Rissettobenefitmanyindustriesandcountriesthroughincreasedtradeandinvestment.Cooperationintheenergyandresourcessectorswillaccelerate.Forinstance,theChina-PakistancorridorismotivatedinpartbytheprospectofanalternativerouteforoilflowsfromtheMiddleEast.EventraditionalindustriesinChina(eg,agricultureinXinjiang)standtobenefitfromB&R.

ThemajorityofB&Rprojectsplannedsofarhavebeenininfrastructure.Tolistafew,41%areinconstructionofrailandhigh-speedrailway,14%inpowerandresources,and17%inroad,airport,port,waterways,bridgesandtunnels.33Assuch,B&Rhasbroughtmostbenefittoregionsalongkeytransportationandenergyroutes,andalsoindustriesproducinginputsforconstruction(eg,steelandconcrete).

31SwissReEconomicResearch&Consultingestimates,usingdatafromdifferentinternationalfinancialinstitutions.SeeAppendixformethodologydetails.

32SwissReestimatesforAsia(excludingHongKong,Taiwan,JapanandKorea),easternEuropeandAfrica.33AccordingtoprojectdatacompiledfromBHI.com.cn,beltandroad.hktdc.com,NDRC,provincial

governmentandnewswebsites,andthewebsitesofcompaniesinvolvedinB&Rprojects.

ManyB&Rmarkets,includingChina,havesignificantinfrastructureshortages.

TheinfrastructuregapintheB&Rregionfortheperiod2015–2030willbeanestimatedUSD20trillion.

Figure 4 CompositionofB&Rinfrastructuredemandbysector,2015–2030E

13% Other infrastructure

34% Power and resources

12% Water and sanitation

11% Telecommunication

30% Transportation

B&RwillbenefitmanyindustriesandregionsinChina.

SofarmostB&Rprojectshavebeenininfrastructure.


Provincial advantagesWithinChina,differentregionsandprovinceshavedifferentpriorities,reflectinglocalcharacteristicsandresourceendowments.Attheendof2015,allofChina’sprovincialgovernmentshadfinalisedtheirlocalB&Rimplementationplans.AsindicatedintheVisions and Actions,thescopeofparticipationofindividualprovincesorcitieswillderivefromtheircomparativeadvantages.Thesecanbegeographical,culturalorethnicalproximitytootherregionalB&Rcountries,oreconomic,industrialandfinancialcapabilities.Industriesthatcanbestleverageandenhancelocalcomparativeadvantagesareexpectedtobenefitmost.

ManyChineseprovincesareessentiallinksinthesixinternationaleconomiccorridors,andtheonemaritimesilkroad.Provincesinnorthwest,northeastandsouthwestChinaaregatewaystocentral,south,eastandwesternAsia,andalsotoRussiaandMongolia.Forexample,HeilongjianginnortheastChinaformsacruciallinkintheChina-Mongolia-Russiacorridor.Givenitsrelativelylowlabourcosts,Heilongjianghasalreadypromptedbusinessesfromthemore-developedsouthernChinatorelocatetheiroperationsthere.OtherprovinceslikeXinjiang,GuangxiandYunnanarestrategicallylocatedatthecrossroadsofseveralcorridors,andwillbenefitfromuniqueadvantagesastradeandlogisticshubs.

ProvincesintheYangtzeRiverDelta,PearlRiverDelta,andthewestcoastoftheTaiwanStraitsandBohaiRimcanexpectfurtherdevelopmentinlandandseatransport,logisticsandport-relatedactivities.Notably,FujianisthecoreoftheRoadgivenitsstrategiclocationonthewestcoastoftheTaiwanStraits.Variousopportunitiesincludingmaritimecooperationarebeingconsidered,andtheestablishmentoftheFujianFreeTradeZonedemonstratesstronggovernmentsupportforB&R-relateddevelopments.

Inregionswithexcessproductioncapacity,industrialupgradingandinternationalcapacitycooperationwilllikelybepriorities.Forexample,ShaanxiprovinceinnorthwesternChinaistraditionallyrichinenergyresourcesandhassufferedinthecurrenteconomicslowdownandlowenergyprices.Hence,whileitwillapplyitsexpertisetodeveloptheenergysectorinChinagenerally,italsowantstoimproveitsownindustrialstructurebyverticallyextendingitsproductionchaintoresourcesrefinement.34

Strengtheningcooperationininternationalproductionthroughsharingofknowledge,capitalandhumanresourcesisakeypartofB&R.Cross-borderenterprisescouldtapintoeachother’shomemarketsandcollaboratetoexpandvaluebybetteraddressingmismatchesinaggregatesupplyanddemand.ForexampleHenan,animportantagriculturalcentreinChina,hasrecentlyinvestedinaproduction,processing,tradingandlogisticsvaluechainprojectwithTajikistanforcotton,vegetablesandlivestock.35Furthermore,internationalcooperationalsospursthedevelopmentofintellectualpropertyrights(IPR)protectionasmoreproductswithlocalIPRareexported.36

34Coal companies leverage the One Belt One Road Initiative to embrace era 3.0,OneBeltOneRoadEconomicandTechnologyCooperationCenter,15May2015,http://edailu.cn/industry/detail/id/1586.html

35“China’sHenanProvinceTeamsupwithTajikistantoBuildAgriculturalIndustrialParktoEndorsethe“OneBelt,OneRoad”Initiative”,China Go Abroad(fromStateCouncilPressOffice),22September2015,http://www.chinagoabroad.com/en/article/china-s-henan-province-teams-up-with-tajikistan-to-build-agricultural-industrial-park-to-endorse-the-one-belt-one-road-initiative

36“ShaanxistrengthensintellectualpropertyprotectiontosupportOneBeltOneRoadstrategy”,China News,29April2016,http://finance.huanqiu.com/br/province/2016-04/8836397.html

Regionalcomparativeadvantageswilldeterminewhichindustriesbenefitmost.

IndustryinprovincesinChinathataregatewaystothesixeconomiccorridorswillbenefitsignificantly.

Coastalregionshaveeconomicandgeographicadvantages.

Industrialupgradingandcooperationwillhelptoreduceovercapacity.

InternationalcapacitycooperationisacornerstoneofB&R…


The infrastructure gap and trade in B&R countries

Cultural,tourism,scienceandtechnologyexchangesareamanifestationofthe“people-to-people”connectivity,oneoftheimportant“fiveconnectivities”inVisions and Actions.37ManyofChina’sprovincesalongtheBeltandRoadhavelongservedasgatewaystoculturallyorethnicallyproximatemarketsoverseas,andtheculturalandtourismindustriesintheseregionscouldbenefitsignificantlyfromB&R.Forexample,Gansuwillpromoteprotectionofculturalheritage,leveragingitsarcheologicalexpertiseinfrescosandancientruins.Atthesametime,ShaanxiiscommittedtobuildingatradingbaseforculturalproductswhileGuangdongisbusyengagingB&Rcountriesintourismcooperationandthepromotionofsilkroad-themedtourismprojects.38

B&R projects already planned AlistofB&RprojectsinbothChinaandothercountrieshasalreadybeenestablished,andinsomecasesconstructionhasbegun.AcountattheendofJuly2016indicatedapipelinemorethan700projects,allwithChineseinvolvement(investorsand/orcontractors).Ofthose,thecombinedvaluein590projectsforwhichnumbersareavailableisUSD1.2trillion(seeTable3).

Theprojectsspanfourcategories:infrastructure,agriculture,culturalexchange&tourism,andothers.Themajority–74%ofthe700–areinfrastructureconstructionprojects,andaccountfor86%ofthetotalvalueofalltheprojects.Agricultureandculturalexchange&tourismtogetheraccountfor10%oftheprojectsand4%oftheirtotalvalue.The“others”categoryincludescommercialandprivate-sectoractivities.

Note:Numbersfor“China”representvaluesforprojectslocatedinChina,andnumbersfor“Overseas”areforthoseprojectoutsideofChina.IfaprojectspansChinaandothercountries(eg,bridgesandrailroadsacrossborders),anestimatedportionisappliedtothecolumn“China”andtherestto“Overseas”.*Includesprojectstopromotecooperationinuseofindustrialproductioncapacity.Source:Visions and Actions;BHI.com.cn;provincialB&Rimplementationplans,ifavailable;StateCouncilInformationOfficeofPRC;provincialgovernmentwebsites;ZhikunEducation;XinhuaNews;JingchuNews;iFengNews;SinaNews;SwissReEconomicResearch&Consulting.

37The“fiveconnectivities”arethefivemajorgoalsstatedinVisions and Actions:policycoordination,facilitiesconnectivity,unimpededtrade,financialintegrationandpeople-to-peoplebonding.

38Cultural content around “One Belt One Road” embodiment,StateCouncilInformationOfficeofthePRC,25August2015,http://www.scio.gov.cn/ztk/wh/slxy/31200/Document/1445975/1445975.htm

…andculturalexchangeprogramsarealsoplanned.

Morethan700B&Rconstructionprojectshavealreadybeenannounced…

…ofwhich74%areinfrastructureprojects.

Table 3 B&RprojectswithChina’sinvolvement,planneduptoJuly2016

Types of project

Aggregate project value (USD bn) Number of projects with published values

Number of projects without published valuesChina Overseas Total

Infrastructure Transportation 619 95 714 277 44Telecommunications 3 0 3 2 1Waterandsanitation 2 2 3 9 1Powerandresources 77 96 173 91 25Otherinfrastructure 88 50 138 56 12

Agriculture Agriculture,forestry,animalhusbandryandfisheries

14 2 17 21 1

Cultural exchange, tourism Culturalexchange,tourism 31 6 37 34 1

Other Capacitycooperation* 11 10 20 29 3Industrialparks 40 14 54 42 19Commercialbuildings 29 16 45 29 7

Total 913 292 1 205 590 114


Future B&R projectsChinahasthefinancialresourcestoscaleupitsinvolvementinB&Rprojectsinthecomingyears.ItisestimatedthatB&RwillbringadditionalinvestmentofuptoUSD5.2trillioninconstructionandotheractivitiesintheperiodAugust2016to2030.TogetherwiththeUSD1.2trillionofalready-plannedprojects,totalinvestmentin2015to2030willbeanestimatedUSD6.4trillion.

Source:SwissReEconomicResearch&Consulting.

ChineseinvolvementinB&Rconstructionprojectsinothercountriescancomeintwoforms–asinvestorand/orcontractor.39Whentakingpartinforeignventures,Chinesecontractorsareinvolvedinthepurchaseofconstructioninsurance.InB&Rprojects,theChinesepartieswillalsobemajor(oftenthemain)investors,andwillhenceplayanimportantroletoindeterminingtheinsurancerequirementsforboththeconstructionandoperationalphasesofaproject.

B&R-relatedtradebetweenChinaandothercountries

TradevolumesbetweenChinaandB&Rcountrieshaveincreasedrapidly,byaCAGRof19.3%fromUSD84billionin2001toUSD998billionin2015.TheshareofChina’stotalexportstoB&Rcountriesnearlydoubledfrom14.5%in2011to26.4%in2015.Inthelatteryear,tradevolumeswithSoutheastAsiannationsaccountedfor46.8%ofthetotaltradewithB&Rcountries,benefittingfromimprovingbilateralrelationsandtheestablishmentoftheASEAN–ChinaFreeTradeArea(ACFTA).

TheimprovementininfrastructureasaresultofB&R,includingtransportandlogisticcentres,willfurtherboosttrade.InMarch2015,PresidentXisaidChinatargetstotaltradevolumeswithotherB&RcountriesofUSD2.5trillionby2025,40implyingaCAGRofalmost10%.Extrapolatingthisgrowthassumptionto2030impliesthattotaltradecouldreachalmostUSD4trillion,aroundfourtimesthecurrentamount.41 Thisisanopportunityforinsurers,withaconcomitantincreaseindemandfortradecreditandgeneralcargocoverage.

39ThisisinlinewithChina’sMinistryofCommerce’squantificationofB&Rprojects.SeeEconomic and trade cooperation with B&R countries 2015,MinistryofCommerceofthePeople’sRepublicofChina,DepartmentofOutwardInvestmentandEconomicCooperation,http://hzs.mofcom.gov.cn/article/date/201601/20160101239881.shtml.

40“B&Rten-yearplan–annualtradetoreachUSD2.5trillion”,www.yicai.com,28March2015,http://www.yicai.com/news/4591913.html

41PleaseseeAppendixfordetailonassumptionsandestimations.

TotalinvestmentinB&RconstructionactivitiescouldreachUSD6.4trillionby2030.

Table 4 AdditionalB&RprojectswithChineseinvolvement,upto2030

Type of project

Aggregate project value (USD bn)

China Overseas Total

Infrastructure Transportation 30 942 972Telecommunication 200 369 569Waterandsanitation 239 434 672Powerandresources 585 1105 1690Otherinfrastructure 171 420 592

Agriculture Agriculture,forestry,animalhusbandryandfisheries

17 55 73

Cultural exchange, tourism Culturalexchange,tourism 38 119 157

Other Capacitycooperation 28 60 88Industrialparks 61 171 232Commercialbuilding 56 138 194

Total 1 426 3 813 5 239

ChinaisactivelyinvolvedinoverseasB&Rprojects.

TheprogramwillboosttradebetweenChinaandtheotherparticipatingcountries.

China’stradewithotherB&RmarketsisprojectedtoreachalmostUSD4trillionby2030.


The infrastructure gap and trade in B&R countries

E=estimates,F=forecasts.

Source:MinistryofCommerce,SwissReEconomicResearch&Consulting.

Figure 5 TradebetweenChinaandotherB&Rcountries,2010–2030F

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5 USD trillion

203

0F

2029

F

2028

F

2027

F

2026

F

2025

F

2024

F

2023

F

202

2F

2021

F

2020

F

2019

F

2018

F

2017

F

2016

E

2015

2014

2013

2012

2011

2010

China’s import from B&R countriesChina’s export to B&R countries


ImpactonChina’scommercialinsurancemarket

OverviewofChina’scommercialinsurancemarket

China’sinsuranceindustry,inbothpersonalandcommerciallines,hasdevelopedrapidlyoverthepastdecade.Commercialinsurance42premiumsincreasedbyaCAGRof17.9%toUSD56.4billionoverthe10yearsto2015,whichisabout42%oftotalnon-lifepremiumsinChina,supportedbystronggrowthininternationaltrade,governmentspendingoninfrastructure,improvedregulationandrisingriskawareness.Chinaisnowthesecondlargestcommercialinsurancemarketintheworld,43althoughtherecenteconomicslowdownhasweighedonpremiumgrowthinthissegment(seeFigure6).

Source:AnnualReportofChina’sInsuranceMarket2016,SwissReEconomicResearch&Consulting.

Overtheyears,insurersinChinahavebeenprovidingmoreriskprotectiontoparticipantsintheexpansionofChinesebusinessandtradeinterestsoverseas.B&Rwilllikelyfurtherboostdemandforcommercialinsurance.Engineeringandliabilityinsurancecoverlossescausedbyaccidents,naturaldisastersorprofessionalnegligenceintheconstructionphaseofprojects,andbymachineryandequipmentbreakdownsintheoperationalphase.Marine,transport,exportcreditandproductliabilityarethekeylinesofbusinessforinternationaltradeactivities.

ImpactofB&RonChina’scommercialinsurancesector

The premium impact: engineering, property, marine and liability insuranceB&Risexpectedtotriggeranewwaveofconstructionactivitiesandtradeliberalisation,drivinginsurancepremiumgrowthbothinChinaandabroad.Basedontheaveragepenetrationrates44andinsurancepricingforeachlineofbusiness,theB&RprojectsalreadyannouncedcouldgenerateanestimatedUSD7billionincommercialinsurancepremiums.UptoUSD5.5billionofthosecouldbebusinessforChineseinsurers.Property,engineeringandmarineinsurancestandtobenefitmost(seeFigure7).Demandforone-offengineeringandmarineinsurancewillcomeduringtheconstructionphaseofprojects,followedbydemandforongoingpropertycoveronceprojectsareupandrunning.

42Commerciallinesincludemotor,enterpriseproperty,liability,guarantee,credit,freighttransport,engineering,shipandspecialrisk.

43Chinarankedthethirdincommercialinsurancemarketinsigma5/2012:Insuringever-evolvingrisks.44Herethepenetrationratereferstosumsinsuredpurchasedasapercentageoftotalprojectvalue,which

isalsoanindicatoroftheinsuranceawarenessofenterprisesinvolvedinB&Rprojects.

CommercialinsurancepremiumsinChinahavegrownrapidly.

Figure 6 CommercialinsurancepremiumsinChina,2006–2015

0

10

20

30

40

50

60 USD bn

0%

5%

10%

15%

20%

25%

30%

Commercial insurance premiums

2015201420132012201120102009200820072006

Real growth of commercial premium (RHS)

Chineseinsurershavebeenprovidingmorecovertopartiesinvolvedinbusinessprojectsoverseas.

B&Rwillincreasetheopportunitiesforcommercialinsurers.


Impact on China’s commercial insurance market

Note:Construction-relatedmarineinsuranceincludesprojectcargoandcoverfordelayedstart-up.Liability/PersonalAccident(PA)includessingleprojectprofessionalindemnity,productliabilityandemployerliability/PA.Source:SwissReEconomicResearch&Consulting.

Beyondthealready-plannedprojects,aroundanotherUSD27billionincommercialinsurancepremiumscouldbegeneratedbyB&Rprojectsthatmaybeforthcomingintheyearsto2030.Ofthat,uptoUSD16billioncouldgotoChineseinsurers(seeFigure8).TotalpremiumpotentialfromconstructionactivitiesinB&Rcountriesintheyears2015–2030couldthusbeUSD34billion,ofwhichanestimatedUSD21.5billioncouldbebookedtoinsurersinChina.


Trade-related premium impactAdditionally,theincreasedtraderesultingfromB&R,includingtradeliberalisationandcustomsfacilitation,couldyieldanestimatedUSD1.5-billionpremiumpotentialforChineseinsurersupto2030.AroundUSD600millionwouldlikelycomefromtradecreditbusiness,andtherestfromgeneralcargo(USD900million,notincludedinthemarineinsuranceaggregatesinFigures7and8).

Figure 7 CommercialinsurancepremiumpotentialforChineseinsurersfromalready-plannedB&Rprojects,bybusinessline

45% Property

1% Liability/PA13% Marine41% Engineering

Premium potentialfor Chinese insurers:USD 5.5 billion

ChineseinsurersaresettogainUSD21.5billioninadditionalpremiumsin2015–2030asaresultofB&R.

Figure 8 CommercialinsurancepremiumpotentialforChineseinsurersfromotherB&Rprojectsupto2030,bybusinessline

32% Property

2% Liability/PA15% Marine

51% Engineering

Premium potentialfor Chinese insurers:USD 16 billion

B&R-relatedtradecouldgenerateUSD1.5billioninnewpremiumsforChina’stradecreditandmarineinsurers.


Lines of business impactedTable5detailstheestimatedpremiumsgeneratedbyB&Racrossdifferentlinesofbusiness.Basedontheseprojections,theInitiativewillboostoverallChina’scommercialinsurancepremiums(engineering,property,marine,liability/PAandtrade-related)byUSD23billion,or3.8%,intheyears2015to2030.Theestimatesareinfluencedbytwokeyvariables.Oneisinsurancepenetrationrates,45whichvaryacrossdifferentlinesofbusiness.Forinstance,whileprojectownerspurchase100%engineeringcoverfortheconstructionphase,onlyaboutone-tenthbuysingleprojectprofessionalindemnity(SPPI)liabilitycovertoinsureagainsttheriskofprofessionalnegligencebyserviceproviders.Thesecondkeyvariableispremiumrates,whichvaryaccordingtolineofbusinessandthecharacteristicsofindividualprojects.Forexample,premiumratesforgeneralcargoinsurancedependonthetypeofproductsbeingshipped,thedestinationandtransportationvehicle.

Note:*Construction-relatedmarineinsuranceincludesprojectcargoandcoverfordelayedstart-up.**Liability/PAincludessingleprojectprofessionalindemnity,productliabilityandemployerliability/PA.Personalaccidentcanbepurchasedinlieuofemployer’sliability,andviceversa.Source:SwissReEconomicResearch&Consulting.

Engineering insuranceEngineeringinsurancecoversawiderangeofrisksinherentinconstructionprojects,includingdelays,designerror,faultymaterial,faultyworkmanship,andbreakdownofplantsandmachinery.Someengineeringpoliciescontainathird-partyliabilityclause(TPL,partofCommercialGeneralLiability,orCGL),tocoverliabilityforpersonalinjurytoathirdparty,ordamagetothird-partyproperty,asaresultofanincidentintheinsuredproject.GrowthinengineeringinsurancepremiumsinChinaeasedto1.5%in2015fromapeakof37.4%in2010,alongsideacontinuousslowdowninfixedassetinvestment.B&R-drivendemandcouldyieldadditionalpremiumsofmorethanUSD10.4billionforChineseinsurersin2015–2030.

Property insurancePropertyinsuranceprovidescoverforphysicaldamageandconsequentialfinanciallosses.ThemostpopularformisAll-Riskinsurance,whichcoversnaturalperilsandaccidentsotherthanthoseexplicitlyexcludedfromacontract.Coversnormallynotincludedareprotectionagainstterrorism,cyberrisksandcontingentbusinessinterruption,althoughtherehasbeengrowingdemandforthesecoversoflate.B&Rislikelytoboostdemandforpropertyinsurance.Moreover,therelocationofmanufacturingplantstoB&Rcountries,mostlyemergingmarkets,hasmaderiskmanagementmorecomplex,furtherdrivingdemandforpropertyriskprotection.

45Penetrationrateherereferstosumofinsurancepurchasedasapercentageoftotalprojectvalue,whichisalsoanindicatorofinsuranceawarenessonthepartofenterprisesinvolvedinB&Rprojects.

B&Rwilldrive3.8%growthintotalcommercialpremiumsforChineseinsurersbetween2015–2030.

Table 5 CommercialpremiumsforChina’sinsurersgeneratedbyB&Rin2015-2030,bylineofbusiness

Commercial insurance linesPremiums of B&R projects

planned so far (USD bn)B&R premiums, August 2016

2030 (USD bn)B&R trade-related premiums,

2015–2030 (USD, bn)Total B&R premiums, 2015–030 (USD bn)

Construction-relatedEngineering 2.2 8.2 – 10.4Property 2.5 5.1 – 7.6Marine* 0.7 2.5 – 3.2Liability/PA** 0.1 0.2 – 0.3Sub-total 5.5 16.0 – 21.5Trade-relatedMarine(generalcargo) – – 0.9 0.9Tradecredit – – 0.6 0.6Sub-total – – 1.5 1.5Total 5.5 16.0 1.5 23.0

TherewillbeanestimatedUSD10.4billionincreaseinengineeringinsurancepremiums,…

…aUSD7.6billion-gaininpropertypremiums,…


Impact on China’s commercial insurance market

Overall,demandforpropertycoverasaresultofB&RisestimatedtoamounttoUSD7.6billioninpremiumsforinsurersinChinaintheyearsto2030.

Marine insuranceMarineinsurancecoversthelossordamagetoships,cargoandassociatedthird-partyliabilities.Italsoincludesthepropertyandliabilityrisksofcontainerterminalsandports.Projectcargoinsurancecoversrisksassociatedwiththetransportationoflarge,heavy,high-valueorcriticalpiecesofequipmentforaparticularproject.Generalcargoinsurance,meanwhile,protectsgoodsintransitandsometimesalsostoredatterminalwarehouses,againsttherisksoftheftanddamagefromfire,lightning,floodingandsprinklers.Inaddition,delayedstart-up(DSU)insuranceprovidescoverageforriskoflossinincomeandprofit(eg,extrainterestincurredonloans)emanatingfromlateornon-deliveryofcriticalcomponents.Intotal,additionalmarinepremiumsforChineseinsurersfromB&RprojectscouldreachuptoUSD4.1billionover2015to2030.

Liability and personal accident insuranceLiabilityinsuranceprovidesprotectionagainstthelegalliabilityassociatedwithpersonalinjury,death,propertydamageorfinancialloss.AscountriesinB&Rregionsaremostlyemergingmarketswithamixofculturalandjudicialsystems,thereislikelytobegrowingdemandforliabilityinsurancefromprojectowners,operators,vendorsandotherstakeholders.However,penetrationiscurrentlystilllowandtheoverallbusinessopportunityto2030isestimatedtobejustUSD300million.ThekeycoverslikelytobenefitfromtheB&RprojectsareSPPI,productliabilityinsuranceandemployer’sliabilityinsurance.Sometimespersonalaccidentinsuranceispurchasedinlieuofemployer’sliabilityinsurance.

Trade credit insuranceTrade(export)creditinsuranceprovidesriskcovertosellersofgoodsorservicesintheeventthatabuyerisunabletofulfilitsobligations.Wardamageandinabilitytooperateduetowar,restrictionsontransferandconversion,andexpropriationhavetraditionallybeencoveredbystandardexportcredit(EC)insurancepolicies,bothforshort-term(lessthan1year)andmid-tolong-termbusiness.Higherexportstypicallyleadtoanincreaseintradecreditinsurancepremiums.Historysuggeststhata1%increaseinChineseexportsisaccompaniedbya0.32%increaseintradecreditpremiums.46B&Risexpectedtoboosttradeflowsand,consequently,premiumsforChina’stradecreditinsurersbyanestimatedUSD600million.

46sigma 3/2016–Worldinsurancein2015,Steadygrowthamidregionaldisparities,SwissRe.

…USD4.1billioninmarinecover,…

…andaUSD300million-riseinliabilityinsurancepremiumsforChineseinsurersin2015–2030asaresultofB&R.

Tradecreditinsuranceprovidescoverageforexportersagainstpoliticalrisk.


SupportingB&Rwitheffectiverisktransfer

ChinesefirmsparticipatinginB&Rfaceculturaldifferencesandoperationalchallengesinthemarketstheyenter.Furthermore,thereareownershiprestrictionsonforeignparticipantsinmanyB&Rmarketsandsometimesalsopoliticalinstability,whichcanbeparticularlyrelevantinthecaseoflong-gestationperiodinfrastructureprojects.AccordingtoarecentsurveyofChinesestate-ownedenterprises(SOEs),thetopthreechallengesforfirmsinvolvedinB&Rprojectsarehavingaclear,long-termstrategyforoverseasinvestmentandexpansion(61%ofrespondents);financingsupport(54%);andtheriskcontrolenvironmentinhostcountries(46%).

Source:“’OneBelt,OneRoad’,TheinternationalizationofChina’sSOEs”,Deloitte Perspectives,Vol5,2016.

Newcountries,newrisks47

Giventhediversepolitical,economicandregulatoryenvironmentsoftheB&Rcountries,thejourneytoestablishandstrengthenconnectivitybetweenChinaandtheotherparticipatingnationspresentssignificantrisksforthepartiesinvolved.

Political risksInfrastructureprojectsarelikelytofacepoliticalobstaclesthroughouttheirlifecycle.Theseincludecancellations,permitissuesandsocialoppositionduringtheplanningandconstructionphases;expropriationandcontractrepudiationrisksduringtheoperatingphase;andregulatory,transfer,convertibility,taxandjudicialrisksthroughtheentirelifecycleofaproject.ThisisduetopoliticalinstabilityinmanyB&Rcountries,includingfrequentchangesintherulingregimeswhichcanimpedehostgovernmentdecision-making.Thegovernanceframeworkinsomecountriescanalsobeweak.Anotheremergingriskisreligiousextremismandterrorism,especiallyinEurasia.Andterritorialdisputes,andRussia’sgrowingwarinessofChina’sinfluenceincentralAsia,couldinterferewithclosercooperationamongnations.SanctionsimposedbytheUSandEUonRussiaremaininplaceandcouldhavelong-lastingimpact.48RussiaisoneofthenationstobelinkedwithChinaandMongoliaontheNewEurasiaLandBridgeEconomicCorridor.DevelopmentsinRussiacouldhaveimplicationsforthesuccess(orotherwise)ofsuchcross-borderprojectsandalsoforcooperationinareaslikeenergyandmining.49

47SwissReEconomicResearch&ConsultingwillpublishasecondpaperonB&RtoelaborateontherisklandscapeinB&RlocationsoutsideofChina.

48ChinaGoingGlobalInvestmentIndex,Economist Intelligence Unit,2015.49J.Feige,“China’sRoadtoCloserTiesWithRussia”,The Diplomat,3August2016,

http://thediplomat.com/2016/08/chinas-road-to-closer-ties-with-russia/

Firmshavetodealwithculturaldifferencesandoperationalchallengeswhentheyentermarkets.

Figure 9 KeychallengesperceivedbySOEsparticipatinginB&R

0%

10%

20%

30%

40%

50%

60%

70%

Oth

ers

Sust

aina

bilit

ym

anag

emen

t

Supe

rvis

ion

Org

aniz

atio

nst

ruct

ure

Post

-mer

ger

inte

grat

ion

Tale

nts

Ris

k C

ontr

ol

Fina

ncin

g

Stra

tegy

61%

54%

46%

33%

26% 24%19%

17%

4%

B&Rprojectspresentvariousrisks.

Politicalriskcouldbeamainchallenge…


Supporting B&R with effective risk transfer

Economic riskRiskresultingfromchangesinmacroeconomicconditionsisoneofthemajorchallengesfacingB&Rprojects.ManyoftheB&Rcountriesareemergingmarkets50andarevulnerabletoexternalshocks,includingweakeningglobaldemand,andcurrencyandcommoditypricevolatility.Forinstance,sincetheUSFederalReservetightenedmonetarypolicyinlate2015,manyB&Rcurrencieshavecomeunderpressure,andnon-performingloanshavetickedhigherinsomecountries.Highinflationratesandeffortstodefendcurrencieshaveledtopro-cyclicaltighteningofmonetarypolicystances(eg,inAzerbaijan,KazakhstanandRussia).ChinesefirmsinvolvedinB&Rprojectsareexposedtothechangingeconomicconditionsliketheseinthehostcountriesinwhichtheyoperate.

Regulatory riskB&Rcountrieshavedifferentlegalandregulatoryenvironments,andtheseareoftennotwell-establishedatall.ThereisincreasinganxietyamongbusinessesinvolvedinB&Rprojectsaboutthelevelofregulationatnotjustthedomestic,butalsotheregionalandinternationallevels.Forexample,energycooperationisakeygoalofB&R.Atthesametime,concernsabouttheenvironmentarebecomingincreasinglyprominent.Althoughmanycountrieshavelegislationtoaddressenvironmentalconcerns,todateenforcementoflawshasnotalwaysbeenrobust.Thiscanputnaturalresources-relatedprojectsunderinternationalscrutiny,whichcaninvolvelegalcostsfor,andreputationdamageto,thepartiesinvolved.

Operational riskOperationalrisk,thatisproblemsresultingfrominadequateorfailedinternalprocesses,peopleorsystems,isfundamentaltomosteconomicactivity.Theserisksareveryrelevantinlarge-scaleinfrastructureprojectswithlongoperatingcyclesandhighuncertaintyinprofitability.Alackofknowledgeoftheeconomicandregulatoryenvironmentsinaforeigncountryisanothersourceofoperationalrisk.Sotooisthepossibilityofbusinessinterruptioninemergingeconomieswithpoorinfrastructureandlowriskmanagementcapability,asisthecaseinmanyB&Rcountries.


50The65countriesreferencedasB&RcountriesinthisreportaredonesoasaccordingtoanalysisbytheChineseAcademyofSciences(pleaseseeAppendix).Ofthese,47aremiddle-incomeeconomiesaccordingtoWorldBankclassification.

…whileeconomicrisksincludevulnerabilitytoexternalshocks.

Withrespecttoregulatoryregimes,legislationontheenvironment(orlackofenforcementthereof)isakeyrisk.

Andlong-terminfrastructureprojectsaresusceptibletooperationalrisks.

Table 6 Politicalandnon-politicalrisksfacingChineseenterprisestakingpartinB&R

Type of risk Description

Political risk Domesticpoliticalinstability;geopoliticaltensions;emergingrisksofreligiousextremismandterroristthreats,etc.

Economic risk Vulnerabilitytoexternalshocks;under-developeddomesticfinancialandcapitalmarkets,infrastructurebottlenecks,etc.

Regulatory risk Underdevelopedjuridicalandregulatorysystems,red-tape,lackofregulatoryclarityetc.

Operational risk Risksresultingfrominadequateorfailedinternalprocesses,peopleorsystems,includingbusinessinterruptionrisk.


Integratedriskmanagement

ChinesefirmsinvestinginB&Rcountriesshouldadoptanintegratedriskmanagementapproach,includingidentifyingthevariousriskspertinenttotheirparticularproject(s).Theyshouldalsoputinplacemitigatingmeasuresincluding,forinstance,supportfromtheinsurancesector.


Chinese insurers in B&R marketsChineseinsurersneedtounderstandtherisklandscapeofthemarketsinwhichtheirclientsoperate.Whiletheymaybewell-informedofunderwritingchallengesathome,someinsurersarelessexperiencedinhandlingrisksoverseas.Akeyquestionforaninsurerconsideringenteringanewmarketisthefeasibilityofgoinginalone,inpartnershipwithalocalcarrier,oracquiringanexistinglocalfirm.Thechoicewillbedependentonhostcountryregulationsonforeignownershipterms.

PartnershipwithlocalinsurersorbrokerscanbeusedtoestablishpresenceinB&Rmarkets.Thisoptionaffordstheforeignentityastronglocalbrandname,marketexpertiseandsupporttomanagelocation-specificobstaclesmoreeffectively.SomeChineseinsurersareengagingwithlocalpartnersforthesereasons,andtoestablishfirst-moveradvantage.Meanwhile,insurancebrokersareleveragingglobalorregionalpartnershipstoprovideinsuranceandriskmanagementservicesto“going-out”Chineseenterprisesandinsurers.FortheB&Rcountries,theparticipationofChineseandothernations’insurersandbrokersincreasestheunderwritingcapacityintheirmarket,andcanalsohelpupgradetheleveloftechnicalexpertiseavailable.

Product strategyThekeyingredientsofinsurancesolutionsforprojectsinB&Rmarkets–pricing,policywording,contractcommitmentandclaimsservices–shouldfollowinternationalbestpracticeswhiletakingintoconsiderationlocalrequirements.Insurersneedtoformcloserelationshipswiththeirclientstounderstandthelatters’needsinB&Rmarkets,andtailorriskprotectionsolutionsaccordingly.ManyChinesefirmsoperatingoverseasareunderinsured.Forexample,therearecaseswhereenterpriseshavebasicconstructioninsurancecover,butthepolicyexcludesnaturalperilssuchasfloodsandearthquakes.Inothercases,thepolicycoversnaturalperilsbutwithlimitsdependingonthedegreeofinsurability.

Oftendifferentlinesofbusinessincommercialinsurancearepurchasedindependently.Thepurchaseofliabilityinsuranceisalsooftenseparatedintoseveralsub-linessuchasemployer’sliability,professionalliabilityandproductliability.Asnewrisksemerge,theseareoftenpurchasedasadd-onstoexistingcovers,orseparately.Inbothcases,thepolicieshavetheirownspecificwordings,limitsandretentions.

Anintegratedriskmanagementsolutionisneeded.

Figure 10 RiskmanagementforenterprisesinvolvedinB&Rprojects Risk identification

identifyallrisks,suchaspolitical,tax,legal,cultural(religious)risks

evaluatepotentialrisksthatmayevolveinaproject

Risk assessment

self-insurance riskpooling insurancesolutions

Risk mitigation

ChineseinsurerssupportingclientsinB&Rmarketsneedtounderstandtherisklandscapeofahostcountry.

Partnershipwithlocalinsurersorbrokerscanfacilitatesmoothentryintonewmarkets.

ManyChinesebusinessinvestingoverseasareunderinsured…

…andbuydifferentlinesofcommercialinsurancecoverinseparatemodules.


Supporting B&R with effective risk transfer

However,largecorporationswantintegratedsolutions,notmodularcover.Thefocusofinsurancebuyersismoreonprotectionofrisk,notlineofbusiness.Asaresult,theuseof“non-traditional”orcustomised/strategicinsuranceintheformofintegratedriskmanagmentprogramsisbecomingmorecommon(seeONE-Constructionsolutionbelow).Thesecanprovidemoreefficientriskprotectionforenterprises,andreducethecostofinsurance.Increasingly,insuranceisintegratedintocorporates’long-termstrategyandgrowthplanstodealwithchallengingcircumstances,suchasmergersandacquisitions,changesinregulatoryregimes,ormarketdislocations.51

Source:SwissReCorporateSolutions,SwissReEconomicResearch&Consulting.

Chinesefirmssettingupoperationsoverseasoftenlacktheskillsneededtomanagerisksinaforeignlocation.Inresponse,someChineseinsurersaretakingan“all-in-one”approachtooffercomprehensiveandpricecompetitiveriskprotectionproducts.Simple,affordableandone-stopsolutionsofthisnaturecanbeveryusefulinlessdevelopedmarketsinparticular.Inadditiontoofferingriskprotectionservicesatlowpricestoconsumerspreviouslyunabletoaffordcoverage,theyhelpbuildbroaderunderstandingofthebenefitsofinsurance.

ONE-Construction solutionOflate,integratedconstructioninsurancecoversarebecomingmorepopular.Forexample,SwissReCorporateSolutionsoffersits“ONE-Construction”coverfordevelopingmarkets(seeFigure12).Thisisaholisticturn-keysolutiontocoverthedifferentrisksthatclientsface.Theoptionsinclude:

Afullrangeofengineering&constructioninsuranceproducts,suchassingleproject,floatersanddelayedstart-up(DSU)covers.

Engineering&constructioncoversthatcanbebundledwithothercommercialinsurancelines.Initialoperations,SPPIandmarinecoversareusuallyrequiredinthecaseofconstructionprojectsinforeigncountries.

Optionsfornon-traditionalinsurancecovers,includingparametricandweatherinsurance,andstructuredsolutions.52

51Seesigma 5/2016–Strategicreinsuranceandinsurance:theincreasingtrendofcustomisedsolutions,SwissRe.

52Ibid,foranintroductiontostructuredsolutions.

Whattheyneed,however,istailoredandholisticinsurancesolutions.

Figure 11 Movingfromtraditionaltocustomised/strategicinsuranceriskmanagement

Traditional insurance solutions

Minimisepriceofrisktransfer

Off-the-shelfproducts

Broker-drivenplacements

Maximisecoverage/minimiseexclusion

Customised/strategic insurance solutions

Optimisetotalcostofinsurablerisk

Pricestability/budgetingcertainty

Addresstailrisk

Portfolioefficiency

Tailoredinnovativesolutions

SomeChineseinsurersaredeveloping“all-in-one”insurancetosupportclientswithoperationsinforeignlocations.

SwissReCorporateSolutionshasdevelopeditsONE-Constructionservicealongtheselines.


Source:SwissReCorporateSolutions,SwissReEconomicResearch&Consulting.

AnotherpossibleinsurancesolutionforagriculturalandindustrialprojectsinB&Rmarketsisweather-indexcovers,whichmitigatetherisksposedbyuncertaintyincashflowsandearningsduetonon-catastrophicweathereventslikehigh/lowtemperatures,levelsofrainfall,snowfall,solarradiationand/orwindspeed.Theenergyindustryisoneofthemoreweather-sensitivesectors.Electricpowerproducingfacilitieshaveheatingandcoolingrequirements,andtheseareimpactedbychangesinweatherconditions.Weatherindexinsuranceprovidespowerfultoolstoenergycompaniestoshiftorhedgerisks.

Government supportInmanycountries,thepublicsectoractsasinsurerforcertainrisksasasupplementtoprivateschemes.Governmentbackstopprogramscancomplementprivatesectorsolutionswhichhavecapacitylimitations,asincaseswhereriskassessmentisparticularlychallenging,and/orwherethemagnitudeofapotentiallossexceedscapacityofprivatesectors(eg,terrorismandverylargenaturalcatastropheevents).

Manycountriesfacingterrorriskhavebackstopprogrammes,includinginEurope(Austria,Belgium,Denmark,France,Germany,theNetherlands,Spain,theUK)andelsewhere(Australia,India,Israel,Russia,SriLanka,SouthAfrica).Somedevelopingcountries,includinginB&Rregions,facesubstantialterrorismriskbutdonothavegovernancesystemsinplace.Inthissituation,publicsectorinvolvementshouldfocusonexpandingtheavailabilityofinsuranceschemes,withtheultimateaimofestablishingaprivatemarket.

Figure 12 ONE-construction:aholisticapproachtoinsurance

Design On-site work Commercial operation

Political risks

Operational hazards

Bondingrequirements

Adverse weather

Future liabilities

Construction basics

Professional mistakes

Supply chain

Theenergyindustryisoneofthemostweather-sensitivesectors,andweather-indexinsurancesolutionshelpelectricpowerproducershedgetheirrisks.

Inmanycountries,thegovernmentoffersre/insurancewhererisksextendbeyondthemeansoftheprivatesector.

Forexampleterrorismriskinsuranceoftenrequiresgovernmentsupport,butthesupportisoftenlacking.


Conclusion

TheB&RInitiativespanssixinternationaleconomiccorridorsandonemaritimesilkRoad,connecting65countriesthataccountfor62%ofworld’spopulationand30%ofglobalGDP.ChinesecompaniesinvestinginB&Rcountriesinthecomingyearswillfaceawiderangeofrisksandchallenges,andalsoopportunities.Chineseinsurerslikewisestandtogain.Itisestimatedthatalready-plannedB&RprojectscouldgeneratecommercialinsurancepremiumsofaroundUSD5.5billionforChina’sinsurers.Andovertheperiodto2030,anestimatedUSD16billioninadditionalpremiumscouldcomefromprojectsthatmaybeforthcominginthecomingyears.Mostofthedemandwillbeforengineeringandpropertyinsurance,followedbymarine,liabilityandtradecreditcover.ThetradeactivitygeneratedbyB&RwillyieldanestimatedUSD1.5billioninpremiumsforinsurersinChina.

EventhoughmanyoftheB&Rconstructionactivitieswillbeinforeigncountries,theinsurance-purchasingdecisionswilloftenbemadeinChina,asinvestorsanddecision-makingbodiesarelocatedthere.ThereiscurrentlyamplecapacityintheChinesemarket,andinsurerswilllikelyleveragetheirextensivedomesticandinternationalnetworkstoharvesttheopportunitiesarisingfromB&R.

TheB&RmarketscanbenefitfromincreasedparticipationofChineseinsurers,bothintermsofunderwritingcapacityandtechnicalexpertise.Generally,partnershipwithinsurersortie-upswithinfluentialbrokersinahostcountrycanbeusefultoestablishalong-termpresenceintheB&Rmarkets.Thisoptiongivestheforeignentityastronglocalbrandname,marketexpertise,andlocalskillstobettermanagelocation-specificobstacles.Insurersalsoneedtobuildcloserelationshipswiththeirclientstounderstandthelatter’sneedsanddesigntailor-madeinsurance.Theuseofcustomisedsolutionsisbecomingincreasinglyimportantasclientsseekmoreholisticriskprotectionfortheiroverseasinvestmentandtradeactivities.

B&Risalong-termstrategicprogram.

ItpresentsmajoropportunitiesforinsurersinChina.

Insurerswillneedtounderstandtheirclients’needstorealisethepotentialbenefitsofferedbyB&R.


Appendix

Research scopeIntheVisions and Actionsblueprintreport,“B&Rcountries”refersgenerallytothecountriesalongtheBeltandRoad,withnoprecisedefinition.ThisreportassumestheB&RregionsasinTable7.

Note:*AsiahereexcludesHongKong,Taiwan,JapanandKorea.


ThereisnoofficiallistofB&Rcountries,andthenumberofnationsinvolvedgrowsalongsideimplementationoftheinitiativeitself.AsofJuly2016,Chinesefirmshadinvestedin60B&Rcountries,upfrom49inOctober2015.53Alternatively,theChineseAcademyofSciences(CAS)saythenumberofcountriestakingpartintheB&RInitiativestandsat65.Table8showsthesecountries.54

53China’sMinistryofCommerce.54ThisreportusestheCASlistofB&RcountriesintheabsenceofanofficiallistfromtheChinese

government.CASwasoneofmainresearchinstitutesinvolvedinsettinguptheB&RInitiativeforthegovernment.SeeG.Peiping,S.Zhouying,L.Weidong,Commodity structure of trade between China and countries in the Belt and Road Initiative area,CAS,May2015;andZ.Jialing,L.Chunla,Y.Guoqing,T.Zhipeng,Spatial patterns and economic effects of China’s trade with countries along the Belt and Road,CAS,May2015.

WhicharetheB&Rregions?

Table 7 B&Rregions Region Population Nominal GDP

Premiums of commercial line

2015,mn 2015,USDbn 2015,USDbnAsia* 4253 19768 44EasternEurope 400 3222 6Africa 962 1536 3B&R regions 5616 24 526 53 ShareofB&Rregionsas%ofworldtotal 77.4% 33.7% 10.9%

AndtheB&Rcountries?

Table 8 B&Rcountries

Region Country Population GDPBilateral trade

with ChinaChina’s ODI

in B&R market

2014 2014, USD mn 2015, USD mn 2014,USD mn

East Asia China** 1364270000 10354832Mongolia & Russia Mongolia** 2909871 12016 5326 503

Russia** 143819569 1860598 67981 634South Asia Afghanistan* 31627506 20038 376 28

Bangladesh** 159077513 172887 14710 25Bhutan** 765008 1959 10 ‒India** 1295291543 2048517 71657 317Maldives** 401000 3062 173 ‒Nepal* 28174724 19770 853 45Pakistan** 185044286 243632 18959 1014SriLanka** 20771000 78824 4567 85

Southeast Asia Brunei** 417394 17105 1509 ‒3Laos** 6689300 11997 2586 1027Philippines** 99138690 284777 45716 225Timor-Leste** 1212107 1417 107 10Cambodia** 15328136 16778 4436 438Malaysia** 29901997 338104 97421 521Singapore** 5469724 307860 80738 2814Vietnam** 90728900 186205 90338 333Indonesia** 254454778 888538 54193 1272Myanmar** 53437159 64330 14681 ‒Thailand** 67725979 404824 75525 839


Appendix

Note:*low-incomecountry,**middle-incomecountry;***high-incomecountry,measuredbygrossnationalincome(GNI)percapita,inUSD,convertedfromlocalcurrencyusingWorldBankAtlasmethodology.

Source:ChinaAcademyofSciences,WorldBank,MinistryofCommerceofthePeople’sRepublicofChina,SwissReEconomicResearch&Consulting.

Region Country Population GDPBilateral trade

with ChinaChina’s ODI

in B&R market

2014 2014, USD mn 2015, USD mn 2014,USD mn

Central Asia Kazakhstan** 17289224 217872 14268 ‒40Kyrgyzstan** 5835500 7404 4341 108Tajikistan** 8295840 9242 1849 107Turkmenistan** 5307188 47932 8645 195Uzbekistan** 30757700 62644 3504 181

Western Asia & Middle East

Armenia** 3006154 11644 333 ‒Azerbaijan** 9535079 75198 666 17Georgia** 3727000 16530 813 224Iran** 78143644 425326 33849 593Bahrain*** 1361930 33851 1126 ‒Egypt** 89579670 301499 12875 163Iraq** 34812326 223500 20586 83Israel*** 8215700 305675 11430 53Jordan** 6607000 35827 3719 7Kuwait*** 3753121 163612 11255 162Lebanon** 4546774 45731 2308 0Oman*** 4236057 81797 17171 15Palestine 4797000 12766 71 ‒Qatar*** 2172065 210109 6874 36SaudiArabia*** 30886545 753832 51838 184SyrianArabRepublic** 22157800 26459 1028 10Turkey** 75932348 798429 21589 105UnitedArabEmirates*** 9086139 399451 48594 705Yemen** 26183676 37449 2324 6

Central and Eastern Europe

Albania** 2894475 13212 559 ‒Belarus** 9470000 76139 1758 64Bosnia&Herzegovina** 3817554 18521 115 ‒Bulgaria** 7223938 56717 1800 20Croatia*** 4238389 57113 1098 4CzechRepublic*** 10525347 205270 11012 2Estonia*** 1314545 26485 1190 ‒Hungary*** 9863183 138347 8071 34Latvia*** 1993782 31287 1168 ‒Lithuania*** 2932367 48354 1351 ‒Macedonia** 2075625 11324 223 ‒Moldova** 3556397 7962 121 ‒Montenegro** 621810 4588 159 ‒Poland*** 38011735 544967 17095 44Romania** 19904360 199044 4486 42Serbia** 7129366 43866 550 12Slovakia*** 5418649 100249 5032 46Slovenia** 2061980 49491 2383 ‒Ukraine** 45362900 131805 7072 5

B&R region 4 521 298 066 23 406 589 998 159 13 312World 7264488769 78037281 4259914 123120Share of B&R region as % of world total

62.20% 30.00% 23.43% 10.80%


Research methodologyThissectionoutlinesthemethodologyusedtoestimatetheinfrastructuredemandinB&Rcountriesandrelatedcommercialinsurancepremiumpotentialintheperiod2015–2030.FirsttheinfrastructureinvestmentneedsandsizeoftradevolumesbetweenChinaandtheB&Rcountrieswereestimated.Thesewerecross-referencedwithpenetrationandpremiumratestoarriveatanestimateofpotentialcommercialinsurancepremiumvolumes.Theend-2015USD/CNYexchangerateof6.5wasusedthroughouttheanalysiswheneverUSDvalueswerenotavailable.

Theassessmentofinfrastructurerequirementswasbasedoninformationfromthird-partysources(seeTable9).Byadjustingforthedifferentassumptions,geographicalscopesandtimehorizonsusedbythosesources,thetotalinfrastructuregapinB&Rcountriesintheperiod2015–2030wasestimatedtobearoundUSD20trillion.

Source:HSBCGlobalResearch,ADBInstitute;SwissReEconomicResearchandConsulting

ThesizeofChina’sexportstootherB&Rcountrieswasestimatedbasedontheassumptionthattheshareofexportsandimportsintotaltradewouldbeinlinewithhistoricaltrends.Threescenarioswereusedtoarriveatanaveragevalue:(1)apositivescenarioassumingfastgrowthinbilateraltradecouldbemaintained

upto2030,butatamoderatingpace;(2)ascenarioassumingChina’sofficialtargetfortradevolumesofUSD2.5trillionby

2025isreached,followedbygrowthatthesamepaceupto2030;and(3)apessimisticscenarioassumingChineseexportsgrowatthesamepaceasGDP.

ThevalueanddurationofeachoftheconstructionprojectsalreadyannouncedwasidentifiedfromanumberofsourcesasofJuly2016,55andcategorisedintofoursectors:infrastructure,agriculture,culturalexchange&tourism,andothers.ThevaluesoftheB&RprojectsplannedsofarweresummedtoarriveatatotalestimateofUSD1.2trillion.UsingestimatesofChina’soverseasdirectinvestmentsandcontractvaluesinB&Rcountries,aswellasChina’sdemandforinfrastructure asapercentageoftotalB&Rregiondemand,thetotalvalueofB&Rprojectsfortheperiod2015-2030wasestimatedtobeUSD6.4trillion.EstimatesforprojectvaluebysectorwerebasedontheplannedB&Rprojectdatabase,andtargetdemandbysectorderivedfromexternalstudies.

TheexpansionintradeandconstructionresultingfromB&Rwillconstitutethemainsourceofadditionalcommercialinsurancepremiumopportunities.ThetotalpremiumpotentialforChineseinsurerswasestimatedbyapplyingappropriatepenetrationandriskpremiumrates.FurtherassumptionsaboutfrontingratesandChineseownershipinoverseaspropertieswerealsoapplied.TheestimatesassumesuccessfulimplementationofB&Rprojects.Giventheuncertaintiesinherentinmakinglong-termprojections,theestimatesshouldbeconsideredastheupperboundofpotentialbusinessopportunity.

55ChinaBuildingProjectinPlan(www.bhi.com),foundedbyBeijingHuaxinjieInvestmentConsulting,co-foundedbytheNationalDevelopmentandReformCommissionInvestmentResearchInstitute,ChinaEngineeringConsultingAssociation,ChinaConstructionEnterpriseManagementAssociation);proposedkeyprojectsbyeachprovincialgovernment.

Estimatingregionalinfrastructuredemand...

...usingthird-partysources.

Table 9 Variousestimatesoninfrastructureneeds

Reference Regional focus Methodology

ADB 32Asiandevelopingeconomies

Econometricapproachbasedontheprojectedgrowthofkeyeconomicparameters

HSBC 11individualAsianeconomiesincludingemergingandadvancedmarkets

UsingtheHSBCAsiaInfrastructureMeasure(AIM)againsteachotherandtheUS.

Swiss Re urbanisation model

Global/Emergingmarkets SwissReER&Cinternalbasedonurbanisationgrowth

EstimatingtradevolumesbetweenChinaandB&Rcountries.

Estimatingthevalueofalready-announcedB&Rprojects.

Estimatingthecommercialinsurancepremiumpotential.


Appendix

Source:BankofChina,FPMarineRisks,AIG,LexisNexis,CCWGlobal,SwissReCorporateSolutions,SwissReEconomicResearch&Consulting.

Table 10 KeycommercialinsurancebusinesslinesandriskcoveredunderB&R

B&R-related business activities

Commercial insurance in demand Risks covered Risk owner

Projects types involved

Construction (construction + maintenance phase)

Engineering(construction/installationprojectallrisksinsurance,machinerybreakdowninsurance)

Risksforlosscausedbyanyaccidentornaturaldisasterexceptforexclusions(eg,engineeringdesign,constructiontechnologyerror,constructionmaterialqualitydefects,andmechanicaldamageofmachineryandequipmentthathappenswithoutexternalmomentum)intheconstructionphaseofaproject,ormachinesandequipmentintheoperationalphase.Someengineeringinsurancepoliciescontainathird-partyliabilityclause(TPL,partofCommercialGeneralLiability,orCGL),whichcoversrisksforcompensationliabilityforthepersonalinjuryorpropertydamagetothethirdpartyinconstructionsitesandadjacentareascausedbyanaccidentinordirectlyrelatedtotheinsuredproject.

Projectowner Allconstructionprojects

Marine(projectcargo)

Risksforlossordamageintransittolarge,heavycargo,criticalpiecesofequipmentofhighvaluetotheproject.


Marine(DelayedStartUp,DSU)

Risksforlossofincomeandprofit(e.g.extrainterestincurredonloans)arisingfromlateornon-deliveryofcriticalcomponentsduetoaccidentaloccurrencesintransit.


Liability(EmployerLiability)/PersonalAccident(PA)

Risksforcostofcompensationforemployees’injuriesorillnesscausedonoroffsite


Liability(SingleProjectProfessionalIndemnity,SPPI)

Risksforprofessionalnegligenceclaimsagainstallprofessionalserviceprovidersincontract(eg,architects,engineers,designers,constructionsupervision,qualifiedsurveysandfeasibilitystudies)uptoacertainnumberofyearsaftercompletionoftheproject


Liability(ProductLiability,partofCGL)

Risksfordamagesorinjuriesresultingfromdefectsinproductsusedinconstructionprojects.

Manufacturersand/orsuppliersofproductsusedinprojectconstruction

Infrastructureconstructionsofrailway,high-speedrailway,subway,power,energyandresources

Construction (operation phase)

Property Risksfordamagestopropertycausedbyincidentssuchasfire,theft,andweatherintheoperationalphaseofaproject.

Propertyowner Allprojectsconstructed

Trade

Tradecredit Risksoflosstotheaccountsreceivablesduetocreditriskssuchasprotracteddefault,insolvencyorbankruptcy.Itcanincluderiskofnon-paymentbyforeignbuyersduetocurrencyissues,politicalunrest,expropriationetc(politicalrisk).

Exporters

Marine(generalcargo)

Riskoflossordamagetofreightfromanyexternalcauseduringshipping,whetherbyland,seaorair.

Exporters/importers/domestictradingparties


Publishedby:

SwissReLtdEconomicResearch&ConsultingP.O.Box8022ZurichSwitzerland

Telephone +41432852551Fax +41432820075Email [email protected]

ArmonkOffice:175KingStreetArmonk,NY10504

Telephone +19148288000

HongKongOffice:18HarbourRoad,WanchaiCentralPlaza,61stFloorHongKong,SAR

Telephone +85225825644

Authors:DrLiXingTelephone +861065638657

Vicky(Wenyin)HuangTelephone +85222775298

XinDaiTelephone +861065638639

Editors:ClarenceWongTelephone +85225825644

PaulRonkeTelephone +41432852660

Managingeditor:DrKurtKarl,HeadofSwissReEconomicResearch&Consulting

TheauthorsofthisreportwouldliketothankthefollowingcolleaguesfromSwissReCorporateSolutionsfortheirinsightsandcontributionstothewritingofthisreport:JuliaCheng,DianaDai,GracieQin,SammiJin,RickPerdian,NanXu,CillaYang,GinnieYangandMayYuan.

Theeditorialdeadlineforthisstudywas15September2016.

Theinternetversionmaycontainslightlyupdatedinformation.

Graphicdesignandproduction:CorporateRealEstate&Logistics/MediaProduction,Zurich

©2016SwissReinsuranceCompanyLtdAllrightsreserved.

Theentirecontentofthisstudyissubjecttocopyrightwithallrightsreserved.Theinformationmaybeusedforprivateorinternalpurposes,providedthatanycopyrightorotherproprietarynoticesarenotremoved.Electronicreuseofthedatapublishedinpublicationisprohibited.ReproductioninwholeorinpartoruseforanypublicpurposeispermittedonlywiththepriorwrittenapprovalofSwissReEconomicResearch&Consultingandifthesourcereference“China’sBelt&RoadInitiative,andimpactoncommercialinsurance”isindicated.Courtesycopiesareappreciated.Althoughalltheinformationusedinthisstudywastakenfromreliablesources,SwissRedoesnotacceptanyresponsibilityfortheaccuracyorcomprehensivenessoftheinformationgivenorforwardlookingstatementsmade.Theinformationprovidedandforward-lookingstatementsmadeareforinformationalpurposesonlyandinnowayconstituteorshouldbetakentoreflectSwissRe’sposition,inparticularinrelationtoanyongoingorfuturedispute.InnoeventshallSwissRebeliableforanylossordamagearisinginconnectionwiththeuseofthisinformationandreadersarecautionednottoplaceunduerelianceonforward-lookingstatements.SwissReundertakesnoobligationtopubliclyreviseorupdateanyforward-lookingstatements,whetherasaresultofnewinformation,futureeventsorotherwise.

Orderno:1507190_16_en

october 2016 china’s belt & road initiative, and the

Documents