Largest energy risk transfer project completed for Uruguay

Swiss Re Corporate Solutions supports low-carbon energy generation, assuming a portion of risk in a USD 450-million weather coverage deal between Uruguay government and the World Bank Treasury.

Weather risk has increasingly become a burden to the Government of Uruguay, reducing generation for renewable energy sources and forcing the government to substitute lost hydro power with costly fossil fuel generated power in case of a drought.

Uruguay relies largely on rainfall for its hydroelectric plants to produce enough electricity and dry conditions can lead to increased energy importation at uncertain costs. In a 2012 drought, this climate variability pushed the government into a deficit when Uruguay had to buy electricity on the international spot market.

To help decrease this financial exposure, Uruguay's Ministry of Finance has entered into a USD 450-million weather coverage with the World Bank Treasury starting January 1, 2014. This landmark transaction, which uses rainfall data and oil prices for settlement, provides the government compensation for the combined risk of drought conditions and an increase in the price of energy thereby reducing a major source of budget uncertainty each year.

Swiss Re Corporate Solutions, the leading provider of risk transfer solutions to the public sector, is taking a significant portion of the risk from the World Bank Treasury. The World Bank's new platform helps to transfer weather and catastrophe risks from government shoulders to private sector risk takers.

Climate change, energy production and fiscal stability

Hydropower is an efficient source of energy with low-carbon intensity and accounts for 17% of the world's total electricity generation. However, as with other renewables, its performance is highly dependent on the weather. Climate change makes weather increasingly unpredictable. Transferring a portion of that uncertainty to risk takers such as Swiss Re Corporate Solutions is an effective way to smoothen cash flows, increase budgeting predictability and thus support investment in renewable energy.

By reducing the government's budget volatility, these risk transfer solutions help the public sector allocate fiscal resources efficiently, enhance long term planning and implement risk management measures to address contingent liabilities. Starting with Mexico's MultiCat cat bond program, also launched with partnership from the World Bank, Swiss Re has worked to help governments understand and manage their financial exposure to weather, natural disasters and other unpredictable events. Other examples include the Caribbean Cat Risk Insurance Facility  which insures 16 governments against natural disasters or the more recently launched Pacific Island Catastrophe Facility.

Building resilience one country at a time

"This transaction, the largest of-its-kind in the weather risk management market, demonstrates how public-private partnerships can help ease the budgetary impact of a volatile climate," said Swiss Re Corporate Solutions CEO Agostino Galvagni.

"Uruguay joins a growing list of governments in Mexico, the Caribbean and the Pacific who are using innovative insurance solutions to address fiscal challenges."

In addition to microinsurance for low income populations, such as the recently announced flood scheme in Bangladesh, government-focused re/insurance solutions contribute to closing the gap between economic and insured losses. Together they can make societies more resilient to the worst of Mother Nature's onslaughts.

Published 19 December 2013


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