Read the full paper here.
This Risk Control study commissioned by FCDO and SECO examines the role of specialist guarantee companies in boosting developing-country investment and growth. We draw lessons for these companies and their equity owners from the experience of prominent monoline insurers operating in advanced economies. The monolines built product-focussed, expertise-heavy guarantee businesses. Crucial for our purposes, through their infrastructure bond guarantees, the monolines helped public authorities in multiple countries to expand Project Finance borrowing without encumbering public balance sheets. Our conclusions may be viewed through the lens of prescriptions for investors in developing country guarantee companies. Such companies should:
- Focus narrowly on products and customer appetite. Products should have features that make them less contestable by competitors, so that sustainable businesses can be built.
- Adopt coherent business models that use capital effectively and offer possibilities of scalability. The models should alleviate but also exploit market inefficiencies.
- Follow thoughtful and coherent ratings strategies, cognizant of what guarantee beneficiaries require and the degree of leverage rating agencies will permit. Ratings strategies should include consideration of tools to sustain ratings as the business develops, most notably reinsurance/risk syndication.
- Build underwriting expertise and control costs while suitably remunerating and incentivising key staff. Controlling costs is important since the demand for guarantees is price elastic and businesses are only sustainable if they are prudent in this regard.
