Kathmandu: Swiss Re Corporate Solutions has collaborated with re/insurance broker Aon and the International Finance Corporation (IFC) to develop an innovative parametric earthquake insurance solution for a hydroelectric power station in Nepal.
The Upper Trishuli-1 Hydropower Project located 70 km northeast of Kathmandu is one of the largest foreign direct investments in Nepal. It’s designed to harness the power of the Trishuli River to create a 216 MW greenfield run-of-river hydropower project that will significantly boost the country’s renewable energy production.
The project is co-financed by a consortium of nine multilateral development banks (MDBs) and development finance institutions. Led by the International Finance Corporation (IFC), this consortium has pooled its resources to finance the construction of this critical renewable energy project.
The 2015 Nepal earthquake severely hindered the progress of the project and made traditional insurers reluctant to provide coverage for earthquakes in the remote location of the dam. This lack of coverage would have negatively affected the project’s investment potential.
Innovating with parametric insurance
The sponsors and financiers were forced to explore alternative coverage to secure the financing for this vital project.
Swiss Re Corporate Solutions, in close collaboration with the lead lender IFC and insurance advisor Aon, was able to structure a parametric insurance cover that met the requirements of all stakeholders. This ultimately enabled the project to progress.
This parametric insurance solution is triggered by the shaking intensity at the project site and is based on shakemaps provided by the United States Geological Survey (USGS) after a major earthquake. Whilst the coverage provides certainty for the full 5-year construction period, it also allows the flexibility of adjusting the insured values year-on-year to reflect any potential delays or changes in the construction process.
Parametric insurance – Sustainable and replicable
This is the first time that the IFC and other MDBs have agreed to finance a construction project backed by parametric insurance, which was also approved by the Insurance Regulatory Authority of Nepal.
This Nepal case shows the value of an innovative parametric risk transfer solution that can be replicated to enable project financing in geographies exposed to natural catastrophe risks.
As the lead insurer on this landmark transaction, Swiss Re Corporate Solutions is proud to provide a solution that helps close the financing gap for critical renewable infrastructure and make the world more resilient. It showcases the value of collaboration and partnerships, and what can be achieved when working closely with partners across the public and private sectors.
“The application of our innovative parametric insurance is a testimony of its value for this project. Its innovative use for construction projects showcases how parametric insurance can be a catalyst to making the world more resilient.” – said Loredana Mazzoleni Neglén, Head of Global Customer and Distribution, and Innovative Risk Solutions, Swiss Re Corporate Solutions.
“Development Finance Institutions’ mandate to stretch the market provides a powerful incentive to consider innovative approaches. The use of parametric insurance to enable long-term project financing speaks to these lenders’ willingness to think outside-of-the-box ” said Veronica Scotti, Chairman of Public Sector Solutions, Swiss Re.
Alex Davies, director for Construction, Power & Infrastructure for Asia at Aon said, “As the risk and insurance advisor, Aon worked closely with Swiss Re to provide the sponsors and lenders the requirements, structuring ideas, and key inputs – such as the risk-specific Probable Maximum Loss modeling – to inform better decisions and enable the innovation of a parametric solution with a positive tangible outcome for all stakeholders.”
“We are very pleased to have partnered with Swiss Re to find an innovative solution for this pioneering project in a priority market for the IFC’s,” said Babacar Faye, IFC’s Resident Representative in Nepal.”