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States May Change Life Insurer Infrastructure Investment Standards

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What You Need to Know

  • U.S. insurers now have about $570 billion in infrastructure investment exposure.
  • The American Society of Civil Engineers predicts the U.S. will need about $2.6 trillion in additional funding for infrastructure projects.
  • From 2010 through 2020, the average cumulative default rate was 13.8% for nonfinancial, non-infrastructure bonds and 1.1% for infrastructure bonds.

State insurance regulators are at the beginning of a process that could eventually make investing in infrastructure projects more attractive to life and annuity issues.

Teams at the National Association of Insurance Commissioners have started the gears turning by preparing a look at U.S. insurers’ infrastructure investments, and on the possibility that U.S. insurers could help to fill infrastructure funding gaps.

The Gaps

Analysts at the NAIC’s Center for Insurance Policy & Research and the NAIC’s Capital Markets Bureau reported that U.S. insurers now have about $570 billion in exposure to infrastructure-related assets.

The American Society of Civil Engineers is predicting that the United States will need about $2.6 trillion in additional funding to pay for infrastructure projects, such as projects involving the construction or repair of transit systems, stormwater systems, dams and flood control levees.

“If the investment gap is not adequately addressed, across sectors, the expected outcome is $10.3 trillion in forgone gross domestic product (GDP), more than 3 million fewer jobs, and $2.4 trillion in reduced export,” the NAIC analysts write.

The United States is on track to record about $23 trillion in GDP, or national income, this year. The infrastructure funding gap impact forecast implies that the gap could cut overall GDP by about 4% per year over the next decade.

Insurers’ Investments

The NAIC analysts estimate that the world now has a total of about $6.6 trillion in infrastructure investments of all kinds.

U.S. insurers account for about 8.6% of that total.

Insurers face many different risks when they invest in infrastructure, such as liquidity risk and facility maintenance risk, but overall, the risk infrastructure borrowers will default is low, the analysts say.

From 2010 through 2020, the average cumulative default rate was 13.8% for nonfinancial, non-infrastructure bonds and 1.1% for infrastructure bonds, and loss recovery rates when issuers defaulted have been higher than for other nonfinancial corporate bonds, the analysts conclude.

The NAIC affects how insurers invest their assets by setting different risk “charges,” or cuts in estimated risk-adjusted value, for different types of assets.

When a life insurer includes a U.S. government bond in its risk-based capital total, it can add the value of the bond without including any risk-related charges. If a life insurer includes a bad, “NAIC 6″ bond in its RBC figures, it has to cut the estimated market value of the bond by 30%.

The NAIC last updated the bond valuation rules in the early 1990s, and it treats infrastructure bonds about the same way it treats other bonds that seem more likely to default, the analysts note.

The Future

The NAIC analysts say they hope the next steps will be for their infrastructure investment review to spark conversations throughout the insurance industry, including at the NAIC.

“Evaluating the suitability of infrastructure investments for insurance companies cannot compromise the core regulatory mission to preserve the solvency of regulated insurance companies and to protect policyholders,” the analysts write.

“The NAIC has been slow to act on changes to the RBC requirements for municipal bonds more generally, which suggests such changes could take some time,” the analysts add.

But the analysts suggest that the strong credit performance of infrastructure bonds may give regulators room to change how infrastructure bonds are treated.

(Image: Adobe Stock)


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