In trust we trust
How partnership programs can help solve the SDG funding puzzle.
Dr. Ansgar West
Managing Director, department Financial & Entrepreneurial Risk Solutions at Munich Re
With the UN’s SDGs seemingly drifting ever further from our grasp, and the financing gap only worsened by COVID-19, the need for Development Finance Institutions (DFIs) to steer ‘big money’ towards developing economies is more acute than ever. The success of partnerships like the Unfunded Risk Participation Program that FMO launched in late 2019 with global reinsurance giant Munich Re can play a key part in that. So we asked Munich Re’s Ansgar West how his company feels about the partnership 18 months after the ink has dried.
Under the Unfunded Risk Participation Program, Munich Re will contribute up to $500m to FMO transactions over the next three years. A significant investment, but Ansgar West, Global Head Financial & Entrepreneurial Risk Solutions, who leads on the partnership for Munich Re, is in no doubt about the potential benefits the program offers his company in return.
“With this program, we access FMO’s strong and longstanding client base, and highly diversified portfolio. Both as a big institutional investor on the asset side and traditional reinsurer on the trade credit side, Munich Re’s credit portfolio had been very much focussed on developed markets. So increasing our credit exposure to emerging markets by partnering with FMO and other banks active in these markets really diversifies our credit portfolio. And diversification is always beneficial from a risk-return perspective, provided the risk is priced and managed appropriately. Obviously emerging economies have their specific challenges for a company like ours, for example around evaluating political risks. So we need people who know how these markets work, and can price and manage the risks involved; which is exactly what DFIs have a great track record in doing.”
“We need partners who know how developing markets work, and can price and manage the risks involved.”
Ansgar says he and his colleagues had high expectations beforehand about the partnership with FMO, but even these have been surpassed. “To date, we’re incredibly happy with FMO as a partner. In terms of the quality of information they provide, but also the degree of professionalism with which they do their credit work. Sometimes speed can be an issue with DFIs, but even with COVID slowing things down that hasn’t been a problem with FMO. Perhaps being relatively small helps, with shorter decision lines; but whatever the reason, FMO seems to have a very entrepreneurial and straightforward culture. There’s also a high level of transparency. Not only on credit selection and risk, but also at a strategic level, for example in how they share their motivation behind investments. That sort of transparency is crucial for us in developing trust between partners.” Such trust is especially important because Ansgar hopes the program is just a beginning. In any case, for now its design makes it well-suited to upscaling. “This is a so-called quota-share program, which means that if a loan from FMO meets certain eligibility criteria, a contractually defined loan amount will become part of this program, of which FMO and Munich Re then each hold a pro-rata share. And given our experience with FMO to date, we’d certainly be open to considering large co-financing capacities where possible.”
A bigger role
Looking further ahead, Ansgar sees a role for (re)insurance companies like his in leveraging further investments to address the SDGs. “As our partnership flourishes and grows, hopefully other major investors out there will see FMO and Munich Re upscaling investments together and that ‘double reassurance’ will persuade them to also co-invest in our projects. Because unlocking such private investment is obviously vital if we’re to start bridging the SDG funding gap.” As an example, Ansgar cites the African Energy Guarantee Facility (AEGF), which was initiated by SFR Consulting, a subsidiary of Munich Re, along with EIB and ATI. The AEFG is supported by KfW Development Bank and provides in total $1bn in political and credit risk insurance for energy access, energy efficiency and renewable energy projects in the region. “The AEGF aligns insurance terms & conditions with the risk profile of sustainable energy projects in Sub-Saharan Africa. This de-risking is key to unlocking and mobilizing private investments. This commitment may seem dwarfed by the $150bn total investments needed to achieve access to affordable, reliable and sustainable energy in Africa by 2030, but it shows the way forward.”
“Transparency at a strategic level is crucial in developing trust between partners.”
Creating familiar ground
So just how much potential do developing markets have, in Ansgar’s view, for companies like his? “We believe emerging markets can and will develop sustainably. Just look at the wealth creation that’s occurred in Asia in the last 20-30 years. Economic development that has been great not only for the local people in those countries, but also for the global economy as a whole, and therefore developed countries, too. It’s a win-win situation.” However, Ansgar feels that one of the major barriers to progress at the moment is investor reluctance to sign up to the unfamiliar. Munich Re are therefore happy to work with DFIs or others to develop innovative new structures that can widen the investor base in projects with clear sustainability goals. “For example, one idea we’ve been discussing with another DFI is to build a fund portfolio together on a quota-share basis. Then, when the portfolio is fully invested, try to make this investible to a bigger group of institutional investors. This may be achievable by enhancing the fund risk profile with a first loss guarantee held jointly by the DFI and Munich Re. Getting a rating agency to rate such a credit-enhanced fund should further help to enable and attract institutional investors.” This may sound technical, but Ansgar believes such innovative structures are vital. “It’s only by offering institutional investors vehicles with which they’re familiar and comfortable that you can unlock and mobilize the private investments that will be a large piece in the SDG funding gap puzzle. This is a challenge that will have to be solved in the coming years, for everybody’s sake.”
Ansgar and his colleagues see both positive and worrying initial signs in how the world seems to be emerging from the COVID pandemic. “Though at Munich Re we anticipate the global economy will expand at a faster pace than after the global financial crisis, this recovery is uneven. Unfortunately, in many developing markets obstacles to vaccination and weaker fundamentals weigh on activity. And while these countries tend to benefit from improving global trade and higher commodity prices, for many of them the recovery is being constrained by frequent resurgences of new COVID-19 cases and lagging vaccination, as well as potential early withdrawal of macroeconomic policy support.” Similarly, while Munich Re expects inflation pressures to be temporary, uncertainties about inflation can increase financial market stress. And again, it is developing markets that are most vulnerable to the risk of globally rising interest rates and subsequent capital outflows. “Advanced economies have started to make joint efforts to tackle the most critical issues and support less developed countries as they try to recover from the pandemic and economic crisis. For example, through vaccine distribution and debt relief. In this respect, the G7 pledge to donate one billion coronavirus vaccine doses to poorer countries was a good signal with hopefully more to come.”
Key role for re/insurance
Returning finally to the climate crisis, how do Ansgar and his colleagues respond to UN Secretary-General Antonio Guterres’ comment at the Insurance Development Forum (IDF) that the re/insurance industry has a ‘key role to play’ in promoting the transformations needed to protect the world from climate change? “Munich Re is on several IDF working groups and our Reinsurance CEO, Torsten Jeworrek, is an IDF Steering Committee Member. The IDF and its projects aim to provide climate risk insurance and related risk management capabilities for 500 million more vulnerable people by 2025. First pilot projects, such as an IDF PPP project for the Peruvian public schools system, have already been launched, but clearly there’s still a lot to do.”