Development finance institutions are increasingly turning to credit and political risk insurance to mitigate risks and boost their origination capacity. With growing insurer appetite, an expanded range of asset classes, and the need to mobilise private capital, Sean Austin, director at BPL explains how CPRI has become a valuable tool for DFIs navigating today’s complex geopolitical landscape.

 

As global economic uncertainties and geopolitical risks intensify, the demand for innovative risk management solutions continues to rise, particularly within the development finance space, where these risks are compounded by the inherent volatility and instability of emerging markets. Against this backdrop, credit and political risk insurance (CPRI) has evolved into a crucial tool for development finance institutions (DFIs), multilateral development banks (MDBs) and export credit agencies (ECAs). Offering a unique way to manage sector and country exposure, CPRI can help DFIs to optimise their balance sheets, mobilise private capital and ultimately expand their portfolios. Here’s how.

 

Enter CPRI

CPRI primarily covers two areas: non-payment insurance and political risk insurance. Non-payment insurance protects policyholders from losses due to non-payment for any reason, providing a comprehensive safety net against default. Political risk insurance, on the other hand, covers losses stemming from politically motivated events such as expropriation, political violence, currency inconvertibility or government interference in contracts. Having long played a key role in unlocking emerging market opportunities for banks, commodity traders, exporters and investors, CPRI is making waves as an indispensable risk mitigation tool for DFIs too. What’s more, the tool’s recent growth, both in scope and sophistication, means that this relevance is only increasing.

Indeed, CPRI has seen an impressive evolution over the past few decades. Initially, the market focused on offering coverage for political risks and non-payment defaults tied to specific transactions. Now, CPRI has since broadened to cover a wide array of asset classes and financial instruments. From single-transaction coverage to more sophisticated portfolio-based models and securitisations, the market now encompasses over 20 asset classes, ranging from sovereign loans to trade receivables. This diversification has significantly enhanced the appeal of CPRI to DFIs.

 

Supporting DFIs’ mission

Given the political, governance and default risks often at play in DFIs’ remit countries, private capital can frequently be deterred from flowing into these regions. CPRI helps bridge this gap by offering coverage against both credit and political risks, thereby mobilising private sector capital to support developmental objectives. In fact, a recent report by the Organisation for Economic Co-operation and Development underscores the limited scale of private sector engagement in development financing, with DFIs mobilising just US$50bn annually. This represents only a fraction of the estimated US$4tn development finance gap, especially concerning the financing needs outlined by the United Nations Sustainable Development Goals (SDGs).

Notably, CPRI is playing a pivotal role in closing this gap. By transferring part of their risk portfolios to insurers, DFIs gain greater origination capacity. Moreover, an important milestone in the evolution of CPRI has been the introduction of a tranche approach to risk transfer, which allows for more granular risk-sharing between insurers and DFIs. Capital is, of course, finite, so this portfolio-based approach has attracted interest from DFIs as a cost-effective way of creating more lending headroom versus additional equity from shareholders. By using tranched risk participation structures, insurers can underwrite increasingly complex transactions while offering DFIs long-term coverage tailored to their developmental objectives.

CPRI is therefore increasingly being regarded by DFIs as a fundamental solution for financing projects that may otherwise be deemed too risky. And this is especially true for emerging markets, such as in Africa.

 

Surging appetite for DFI risk

Africa, as a key focus region for many DFIs, represents significant opportunities for CPRI. Historically, the continent has been at the forefront of the market’s political risk coverage, with insurers working closely with multilateral institutions to provide the necessary risk mitigation for developmental projects. Today, Africa accounts for approximately 12% of BPL’s US$85bn portfolio, indicating strong insurer risk appetite and a commitment to supporting the region’s growth.

As Africa continues to develop, new sectors such as digital infrastructure and climate transition projects are emerging as key areas for growth. Although these sectors may pose challenges due to their nascency, DFIs, with their local knowledge and developmental mandate, are well-positioned to crowd in private insurers and expand CPRI coverage to these high-potential areas.

 

The importance of strong partnerships

DFIs can, however, face several challenges in expanding the use of CPRI, particularly in less familiar markets. Understanding the nuances of the CPRI market, such as how insurers perceive risks in different jurisdictions and the importance of preferred creditor status, can significantly influence the ability of DFIs to secure adequate coverage.

Preferred creditor status, for instance, often influences insurers’ willingness to underwrite certain transactions. Larger and more established MDBs with this status could find insurers’ favour.

For DFIs, success in using CPRI therefore largely relies on building strong, transparent relationships with insurers. The most successful institutions are those that foster partnerships, where insurers are viewed not just as risk-takers but as collaborative participants in the development process. Insurers need to understand the origination strategies, risk management processes and broader missions of DFIs to provide adequate and tailored coverage.

Moreover, DFIs can learn valuable lessons from other sectors that have effectively used CPRI to extend their financing capacity. The property and casualty insurance market, for instance, operates on a partnership-driven approach, with insurers playing an active role in risk management and portfolio diversification. DFIs can replicate this approach to extend their own use of CPRI.

 

A path for continued growth

Despite the challenges, the outlook is optimistic. Today, insurers are increasingly willing to follow DFIs on their developmental journeys, pushing out tenor capabilities and diversifying their portfolios to meet emerging needs.

As more DFIs recognise the value of CPRI, and as insurers respond to evolving demands, the market will continue to grow. This growth will be driven by both an expanding range of insurable asset classes and an increasing need to mobilise private capital to achieve global developmental objectives. Notably, insurers are placing a growing emphasis on environmental, social and governance (ESG) targets, aligning their business with the SDGs championed by DFIs.

CPRI has emerged from the shadows to become a critical tool for DFIs navigating today’s complex global landscape. As geopolitical risks evolve and developmental financing needs expand, the CPRI market will remain a key partner for institutions aiming to create sustainable growth in emerging and frontier markets.