IDRIMA, the Integrated Disaster Risk Management Alliance formed by the Insurance Development Forum (IDF) and AFD Group (Agence Française de Développement and Expertise France - AFD), has proposed parametric insurance as a tested and yet-to-be-scaled solution for protecting hydro-dependent utility revenues.
In a new paper, “From Exposure to Protection: The Case for Parametric Insurance Revenue Cover for Hydro-Dependent Utilities in Eastern and Southern Africa”, IDRIMA says that hydropower accounts for over 17% of electricity generation across Africa, and above 80% in countries such as the Democratic Republic of the Congo (DRC), Ethiopia, Malawi, Mozambique, Uganda and Zambia. This dependence makes electricity supply, public finances and sovereign creditworthiness directly vulnerable to hydrological variability, a risk that climate change is making more frequent, more severe and increasingly unpredictable.
Yet, the vast majority of African hydropower utilities carry no structured financial protection against drought-driven revenue shortfalls or excess-rainfall disruptions. When shocks occur, as they already do and will do more often, the losses cascade from the asset, to the system operator, to the ministry of finance, and ultimately to countries’ credit ratings and borrowing costs.
Ms Celine Boulay, IDRIMA facility lead at the AFD Group, said, “The current El Nino-Southern Oscillation (ENSO) makes the risks faced by energy utilities a stark reality, especially in Africa and Latin America.”
Ms Ekhosuehi Iyahen, IDF Secretary General, said, “Energy supply is at the heart of every country’s economic and social development; when it fails, people and businesses suffer real consequences and economies pay the price. The role of insurance is to facilitate development and protect from shocks.”
Parametric solutions
The paper says that in parametric insurance for hydro-dependent utilities, the index can be hydrological (reservoir inflow, streamflow), meteorological (wind speed, rainfall, temperature), or geophysical (seismic intensity).
Revenue protection with parametric insurance, can be designed and priced at the energy system level—capturing the aggregate exposure of a utility’s entire generation portfolio, or even of an interconnected national grid. This system-level approach allows for more accurate operational risk quantification, more efficient cover structuring, and a tighter alignment between the insurance product and the financial reality of the insured entity. In a well-designed risk layering approach for an energy utility, retention covers the frequent attritional layer, revenue insurance covers both the moderate recurring and the severe insurable tail, and the catastrophic residual beyond insurance capacity is backstopped by sovereign instruments. The art of the strategy lies in calibrating the thresholds between layers —the deductible, the limit, the retention—to match the utility’s risk appetite, budget, and the actual shape of its loss curve.
The paper also highlights the potential for regional risk pooling to expand access to protection.
About
IDRIMA is a facility under AFD Group designed to better integrate insurance and climate risk transfer solutions into development finance.
AFD Group finances and drives the transition to a fairer, safer and more resilient world, working with its partners to support communities all over the world.
The IDF is an industry-led public-private partnership that brings together insurance industry leaders, government officials, and international organisations. Launched at the UN Conference of the Parties (COP21) Paris Climate Summit in 2015, the IDF looks to leverage the technologies, expertise and financial mechanisms native to the insurance industry to enable disaster-vulnerable nations, economies and populations to build risk understanding and enhance resilience.