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
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.