The World Bank’s private sector division has finalized its largest agreement to date, allowing an insurance company to take on the credit risk of loans. This comes as development banks look to boost their capital amid declining public aid to poorer nations.
On Tuesday, the International Finance Corporation (IFC) revealed a deal worth $6 billion with 19 insurance firms, including notable names like AIG, Chubb, Swiss Re, and Tokio Marine. This agreement is intended to back $10 billion in new financing opportunities.
This significant deal will enable the IFC to issue larger loans, especially at a time when major Western donors—including the U.S., U.K., Germany, and France—are cutting funding to developing nations and organizations like the World Health Organization.
John Gandolfo, the Chief Financial Officer of IFC, mentioned that while the World Bank Group and multilateral development banks hold substantial capital, it’s insufficient to meet the financing needs required for developmental goals.
This latest policy effectively doubles the size of IFC’s previous agreements made earlier in 2024, increasing the total pool of available credit insurance to $25 billion. This program compensates insurance companies for taking on some of the risk linked to nonpayment of new loan portfolios.
According to Gandolfo, the expanded utilization of credit insurance aligns with developing a new asset class expected to yield over $100 billion in annual risk-sharing transactions with private sector entities. This trend emerges amid a backdrop where obtaining official development assistance is increasingly challenging.
Last year, the U.S. significantly reduced its foreign aid allocations and shut down the main agency responsible for this distribution, the U.S. Agency for International Development. Likewise, the U.K. and Germany have made similar cuts in their aid budgets.
This transaction illustrates the expanding lending risk market, which can connect institutional investors searching for stable, long-term assets in emerging markets with development banks that want to leverage private capital for their lending, ultimately aimed at job creation and economic growth.
In a pioneering move last year, IFC securitized a $500 million portfolio of its loans. They’ve also invested in packaging loans from emerging markets via commercial banks, a practice aimed at minimizing credit risk known as material risk transfer.
Other development finance institutions like the Asian Development Bank and the Inter-American Development Bank’s private sector arm have initiated their own credit insurance programs recently. Regional development banks in Africa are also utilizing credit insurance extensively as part of their total loan offerings.
Multilateral development banks (MDBs) are promoting these agreements based on their ability to leverage their expertise and scale in areas where insurers typically struggle to underwrite borrowers independently.
Now, insurance companies have the chance to engage as well. The Global Emerging Markets Risk Database shows that the average default rate in private sector lending from development banks has been approximately 3.5 percent over the last 30 years, with a recovery rate of 73 percent from defaults.
Simon Hunt, the UK and Ireland CEO of HDI Global, one of the involved insurers, remarked that IFC’s well-structured portfolio approach creates an efficient and managed environment for insurers to deploy their capacities on a large scale.
In a paper released this month, researchers Chris Humphrey and Chris McHugh from ODI Global expressed that insurers traditionally participate in IFC’s credit insurance schemes due to the appeal of the overall portfolio, which they find more attractive than addressing cases individually.
They also noted that, while insurers are increasingly willing to partake in such arrangements, it’s growing harder to price this insurance competitively with government loan rates.
When asked if a tension exists between the profit motives of private investors and the development objectives of the IFC, Gandolfo indicated a shared interest in a common ground: “There’s a Venn diagram where they meet.” He emphasized that more projects need to be initiated, while also considering private investors’ involvement.
Simultaneously, he reiterated, “We are a development agency and our focus must be on developmental impact.” He believes it’s possible to achieve a balance.
