Managing Project Risks: 5 Ways Credit Solutions Can Help

Managing Project Risks: 5 Ways Credit Solutions Can Help
Trade

03 of 11

This insight is part 03 of 11 in this Collection.

March 28, 2023 10 mins

Managing Project Risks: 5 Ways Credit Solutions Can Help

Managing Project Risks: 5 Ways Credit Solutions Can Help Hero Image

Credit insurance tools can help businesses to optimize risk allocation and increase project bankability.

Key Takeaways
  1. Poor alignment on risk between public and private stakeholders and inadequate risk allocation across all parties is a common reason for project delays and failures.
  2. Credit and political risk insurance can help to mitigate risks and increase funding viability of projects.
  3. The key benefits of credit and political risk solutions include enhancing project valuations for investors and sponsors and protecting cash flows.

Project finance has become one of the fastest growing asset classes covered by the credit insurance market. Many underwriters are synthesizing the risk engineering expertise of their construction insurance peers to develop a holistic risk view of infrastructure projects, building their capacity to support all clients involved, from lenders and sponsors to EPC contractors and other stakeholders.

Three major markets in Asia Pacific — Singapore, Australia, and Japan — recognize credit insurance as a regulatory capital relief tool to lower risk-weighted assets, while Malaysia and Taiwan have implemented regulatory policy changes that are leading to greater adoption of credit insurance by local banks.

By increasing the sums lenders can commit to a project, credit insurance solutions are proving to be a boon to capital mobilization. Simultaneously, tailored political risk products can also enhance the bankability of project structures. As global infrastructure development becomes increasingly reliant on project financing methods, credit solutions are emerging as an important tool for optimizing risk allocation and accessing better financing.

“It may be known as credit insurance; however, our industries capabilities go well beyond protection. We facilitate access to new forms of capital, helping to drive growth opportunities in both developed and emerging markets,” says Gary Lorimer, Aon’s Growth Leader for Credit Solutions.

Gaps in Risk Allocation

Project delays and failures are often caused by the poor alignment between public and private stakeholders on risk matters and inadequate risk allocation across all parties. This not only creates exposure to risk events that may occur in the future but can also prevent the project from getting off the ground in the first place, by compromising financing efforts.

From potential issues with credit to construction and supply, businesses must fill all gaps in risk allocation across a project’s ecosystem to enhance funding viability.

“Project risks are multifaceted, interrelated and evolving,” says Stephen Taylor, head of Aon’s Credit Solutions in Asia. “Businesses can benefit from leveraging insurance and alternative capital to safeguard their investments and unlock new opportunities.”

250%

Increase in the number of insurers actively insuring project finance transactions in the last five years.

Source: Mobilising Capital and Enhancing Project Bankability with Structured Credit Solutions

Read the Article
Quote icon

We facilitate access to new forms of capital, helping to drive growth opportunities in both developed and emerging markets.

Gary Lorimer
Aon’s Growth Leader for Credit Solutions

Five Key Benefits of Credit and Political Risk Solutions

Credit and political risk solutions offer strategic ways to mitigate potential threats and enhance project bankability.

  • Securing quality EPC contractors
    Having credit solutions in place encourages established Engineering, Procurement and Construction (EPC) contractors to take on projects in challenging contexts knowing that they can limit their own financial losses in case of contractual termination or non-payment. In turn, having experienced contractors on board can reduce construction risk and give peace of mind to potential project backers.
  • Enhancing valuations for investors and sponsors
     Political risk solutions can protect projects against the negative impact on the value of equity investments because of government intervention. For example, critical contracts, such as concession agreements or export licenses can be insured against the risk of termination or breaches by the host government. Sponsors can leverage political risk insurance to reduce country risk in the long term, lowering internal rate of return thresholds for investment decisions.
  • Protecting project cash flows
     Key sources of cash flows for infrastructure projects, such as offtake or power purchase agreements, can be protected through breach-of-contract or non-payment solutions.
  • Supporting supply chain resilience
     Insurance solutions can mitigate performance risk in the supply chain, bolstering resilience in a volatile commodities environment. For example, should a pre-paid balance not be returned following a supplier default, insurance can indemnify the financial loss, thereby absorbing any cash flow impact on the project. In a time of rising fuel costs, mark-to-market credit solutions can mitigate financial losses suffered when an original supplier defaults and the new supply comes at a higher price.
  • Increasing infrastructure lending capacity
     Businesses can gain access to liquidity by ensuring that risk is managed well. Lenders can use insurance capital – covering the credit risk of project loans and bank guarantees – to increase credit facilities. Contractors can also access surety solutions for guarantees issued in various forms throughout the project lifecycle, from bid bonds and advance payment bonds at the project’s start to decommissioning performance bonds upon completion.
Quote icon

Project risks are multifaceted, interrelated and evolving. Businesses can benefit from leveraging insurance and alternative capital to safeguard their investments and unlock new opportunities.

Stephen Taylor
Head of Aon’s Credit Solutions in Asia

Learning from History

Numerous critical infrastructure projects have suffered huge financial losses that continue to have repercussions. Some controversial examples are:

Managing Project Risks: 5 Ways Credit Solutions Can Help Infographic
Talk With Us
  • Gary Lorimer
    Aon’s Growth Leader for Credit Solutions
  • Stephen Taylor
    Head of Aon’s Credit Solutions in Asia

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Property Risk Management

Our Property Risk Management collection gives you access to the latest insights from Aon's thought leaders to help organizations make better decisions. Explore our latest insights to learn how your organization can benefit from property risk management.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
View All
Subscribe CTA Banner