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Global Programs & Captives Regional Director, Asia-Pacific, AXA XL

The Belt and Road Initiative (BRI) is an ambitious infrastructure development strategy announced by the Chinese government. The initiative will cover more than 70 countries and is expected to cost about US$1 trillion. Chinese companies are believed to have secured construction contracts worth more than US$340 billion and the Chinese Government has invested more than US$210 billion so far. The sheer size of this project means that impact of the BRI will go far beyond those companies directly involved. Shiwei Jin, Global Program & Captive Regional Director, Asia, at AXA XL in Hong Kong, explains how clients are exploring the use of captive structures and global programs to help them manage the risk of the initiative, whether they are directly involved or not.

Q. What impact is the BRI having on risk management and risk transfer strategies?

A. The size of the BRI means that the dynamics of even traditional insurance products, such as construction, property, energy, liability and marine, will change and clients – along with their brokers and (re)insurers - will need to look at these coverages in a new light. A large amount of BRI projects are unprecedented in the BRI countries in terms of scale and complexity. For example, the planned railway between China and Laos will have as many as 75 tunnels – this is a huge construction project requiring large insurance limits and expertise. In addition, there are a new set of complex stakeholders such as Chinese and local government agencies, multinational organizations, local community with new social and economic demands. These would require new skills to handle the relationships among local insured, claimants, regulators, investors and interest groups. Lastly, these insurance products would require a great deal of expertise in terms of risk engineering, underwriting and claims services.

And clients will need to explore more ‘niche’ products to cover some of the newer risks that will arise from involvement in the BRI countries.

It is important for our risk management community to think of the BRI with a longer-term horizon. The BRI is slated to continue until at least 2030. This sort of timescale lends itself to a captive structure which can evolve alongside the risks.

The massive investment in BRI will lead not only to an evolving risk landscape, but also to an enhanced level of risk knowledge base in these local markets. This increased concentration of knowledge will, undoubtedly, add to the already increasing sophistication of risk management among clients operating in Asia.

Q. What sorts of risks do clients involved in the BRI need to consider?

A. There are many risks that will grow in importance – both for clients that are participating in BRI projects, and also for those without a direct involvement in the initiative but with operations in countries along its path. Some of the countries along the BRI route compulsorily require companies to buy certain insurance coverages, such as employer liability and environmental pollution liability. And many of those same countries are becoming increasingly litigious. Clients need to pay attention to those developments.

Many of the risks involved in the BRI projects are regulatory, operational, political and economic and there have been many insightful analyses of them. From a risk transfer perspective, companies with operations in countries along the route would need niche products such as terrorism, kidnap & ransom, political risk, project cargo for the right solutions with relevance, clarity and certainty to protect their people, property and revenue. My colleagues in crisis management consistently tell me: “Crisis Management products are more than capital, or insurance coverages. They include access to response consultants, who help clients prevent incidents and work with them to handle a crisis, including developing and implementing a media response strategy should something go wrong. For a company, keeping its people safe whatever the risks they face and wherever they are in the world matters a great deal.”

Insurance products need to be constantly reviewed and updated if necessary, to help businesses keep pace with the ever-changing risk environment, whether they are security threats from war, insurrection, and kidnapping to emerging risks such as cyber extortion and active assailants. Existing captives and prospects need to actively engage their brokers and (re)insurers to stay on top of the development of such niche products in the relevant markets to better understand the risks involved and the coverages provided, so that they can build a holistic risk management strategy around them. And when captives are ready, they could take on some of these newer, more esoteric risks such as cyber and terrorism, which will benefit their insurance placement as well as the overall risk management

Q. What about China-based companies?

A. Within China itself, many companies’ insurance-buying historically was driven by contractual requirements. And that purchase typically focused on property coverages. But since the beginning of the BRI, these companies have had greater exposure to the regulatory, compliance and risk requirements from elsewhere in the world. The awareness of risk issues has greatly increased and these companies’ risk management and insurance-buying strategies have become more sophisticated, focusing on liabilities and people risk as well as traditional property coverages. China-based clients are, like those based elsewhere, subject to the changing dynamics of risk. Captives can be a useful tool to enable clients to participate in local risk, and we expect to see continued interest in captives as part of a risk management strategy.

Q. If companies are not involved in BRI projects, how will the initiative affect them and their risk mitigation?

A. Companies need to engage with the changes that the BRI will bring to the whole economic ecosystem, whether or not they are participating in the initiative themselves. The risk management and insurance dynamics of countries along the BRI route are changing and will continue to change as a result of this initiative. Rates for certain types of insurance coverage may be driven up or down, and local standard and best available coverages will evolve, depending on the nature of the risks and local insurance market dynamics. Captives can, of course, be used to retain risks that are unacceptably expensive to place, or for which coverage is not fully available in the open market. For multinational corporations, captives can use a global program fronted by global carriers who have expertise in everything from tax, legal, credit and claims management. Captives can then retain risks across the concerned multiple territories in a compliant way and benefit from the cost efficiency and risk management expertise.

This article first appeared in International Programme News.

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