Washington, D.C., January, 14 2002
—The International Finance Corporation (IFC), the private sector arm of the World Bank Group, will invest US$10 million in a weather risk management project aimed at introducing weather hedges to emerging markets. A key goal of the IFC investment – its first in the weather risk sector – is to improve the economic stability of weather sensitive private sector enterprises in developing countries.
Weather hedges, or derivatives, protects a range of industries against weather-related damages, most notably in the agriculture and energy sectors, but also in transportation, construction, leisure, and insurance industries. Farmers particularly benefit from weather hedge products, since they offer a valuable shield against crop risk failure owing to drought or severe weather. A key interest of the IFC is to apply weather derivatives to agricultural risk management in developing countries, thereby reducing the vulnerability to poverty in rural areas.
Currently, the market for weather hedges is underdeveloped in emerging markets. Sensing a need to fill that gap, IFC has joined with Aquila Inc., to create the $80 million Global Weather Risk Facility (GWRF). Aquila will syndicate $70 million of GWRF to its network of reinsurance partners. In addition to the capital support, Aquila will leverage relationships with international banks and insurance companies to source weather risk in developing countries.
GWRF will help transfer weather risks from businesses with systemic exposures into Aquila’s globally diversified weather portfolio. Businesses ranging from a farm to a large power plant will benefit from GWRF’s weather hedges.
Mr. Jean-Paul Pinard, Director of IFC’s Agribusiness Department, said, “The GWRF will help launch an innovative insurance product and much-needed hedging instrument in emerging markets. The hedges will also help farmers manage their crop failure risk and make them more creditworthy.”
According to Mr. Ravi Nathan, General Manager of Aquila’s Weather Group, the global weather risk portfolio will benefit less developed economies through the risk mitigation generated by global diversification. “An efficient weather risk management business has to necessarily be global in its very design to capture the power of diversification and natural weather offsets. In this context, an $80 million facility can underwrite upwards of $400 million of weather risk,” he said.
The Kansas City-based Aquila is one of the world’s leading market-makers of weather derivatives. A weather derivative is a financial instrument that has a pay-off derived from one or more independently measurable weather parameters. Aquila is a leading wholesaler of natural gas and power in North America and a provider of risk management services. Aquila also provides wholesale energy and risk manager services in the United Kingdom, Germany and Scandinavia. Aquila is wholly-owned by Kansas City-based UtiliCorp United, an international energy company with 4 million customers across the U.S. and in Canada, the United Kingdom, New Zealand and Australia. Additional information is available at
www.aquila.com
.
IFC’s mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve people's lives. IFC finances private sector investments in the developing world, mobilizes capital in the international financial markets, and provides technical assistance and advice to governments and businesses. Since its founding in 1956 through the close of the last fiscal year on June 30, 2001, IFC committed more than $31 billion of its own funds and arranged $20 billion in syndications for 2,636 companies in 140 developing countries. IFC’s committed portfolio at the end of FY01 was $14.3 billion.
