Swiss Re Corporate Solutions receives award for Weather Risk Management Transaction of the Year 2012
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Swiss Re Corporate Solutions has been awarded Weather Risk Management Transaction of the Year 2012, by Environmental Finance, for structuring a precipitation index insurance solution for Guangdong Meiyan Hydropower Co. Ltd.; the first risk transfer deal of this type in China.
Swiss Re Corporate Solutions in cooperation with Dinghe Property Insurance Co. Ltd. structured the deal in 2011 for Guangdong Meiyan Hydropower, a Shanghai Stock Exchange-listed company which operates five hydroelectric stations in Guangdong province of China. The transaction, a precipitation index insurance solution, was the first of its kind, as no energy company had ever used weather index insurance to hedge exposure in China. Based on the policy, if the average accumulated precipitation in the specified area is lower than the predefined trigger, the insurer shall indemnify the insured up to RMB 80 million.
Such cover provides multiple benefits to hydropower energy companies. Firstly, it provides a feasible solution against weather exposure. In the last few years, drought led to significant loss for some hydropower generating companies. For instance, the drought caused significant reduction on the power production of the hydropower companies in southwest China in the winter of 2009 and the spring of 2010. Some companies suffered more than 50% reduction of their power production. No risk transfer solution was available for such situations in the past. Precipitation index insurance fills the gap and enables the hydropower companies to keep their weather exposure at acceptable level, and thus to focus the resources on other fields of strategic importance.
Secondly, it has low loss assessment cost and quick payout. Precipitation index reduces the costs for loss assessment by mainly using the precipitation data from the meteorological offices and by estimating the loss through a predefined precipitation index. In doing so, it also reduces the risks of moral hazard. The payout of such solutions can be fast, once the required precipitation data is available.
Besides hydropower generating companies, weather protection can also be applied to wind power companies as well as other energy companies. For instance, the performance of the wind farms is impacted by the wind speed. The wind turbines start operation only when the wind speed is above certain level, e.g. 3.5 meter per second, and have to stop operation when the wind speed is higher than 25 meter per second. Through wind protection, the wind farm operators can transfer the wind risk to the insurers and thus achieve relative stable revenue and profit.