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Bob Carcano
Sr. Counsel, Investment Analysis Office
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NAIC Center for Insurance Policy and Research (CIPR)

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Infrastructure Investments

Last Updated 4/30/2018

Issue: “Infrastructure” encompasses projects long financed by governments and private projects long financed by banks. Government financed infrastructure projects are subject to known legal, financing and regulatory paradigms, while private infrastructure is subject to privately developed arrangements. An insurer can get infrastructure exposure by buying municipal bonds or bank loans. However, if it wants to invest in a project directly, it has to find the projects because there is no market mechanism to provide the type of information typically provided by market mechanisms. Information used typically includes available investments, credit risk of the projects, documentation standards and pricing.

Infrastructure has two other characteristics important for this discussion. One is the project has to be built before cash flow for repayment exists. The other is infrastructure projects are large scale, regional/national, complex and individually unique. This all means infrastructure projects require significant time and resources to find and study before risks and potential rewards can be understood.

Background: A number of factors have contributed to insurers’ interest in direct investments in infrastructure. New bank regulations are likely to cause banks to significantly decrease infrastructure lending while government infrastructure funding is facing significant politically headwinds. At the same time, infrastructure projects are ideal investments for an insurer: they lead to long lived assets; generate predictable revenue over their life and are highly illiquid providing a better return and reducing reinvestment risk. Each stage of an infrastructure project (i.e., planning and design, approval and construction, operation and then maintenance); involves different risks and attracts investors that want that risk. It isn’t clear that insurers want or need new regulatory paradigms to have exposures to the different project stage risk profiles or that they want a paradigm so an insurer or group of insurers could invest in all of the stages of a given project.

Status: In 2016, the NAIC Valuation of Securities (E) Task Force evaluated whether potential impediments to insurer investment in infrastructure existed. Industry's primary concern was transparency: before an insurer deploys capital it needs to know how the investment will be treated. The corollary, or course, is before transparency can be provided the NAIC needs to know what insurers want to invest in. Undoubtedly, infrastructure investments require a unique analytical construct.

In 2017, the NAIC Securities Valuation Office (SVO) worked with the ACLI to create transparency standards, analytical criteria and methodology for power generation and renewable energy projects. SVO sponsored the discussions because it knew insurers are interested in this space and that insurers were concerned SVO standards were not clear. Industry representatives continue to reach out to the SVO on ways to improve the evaluation of infrastructure investments; including, an attestation protocol process. Additionally, the Task Force continues to be involved in a number of related initiatives.