Swiss Re Insurance-Linked Fund Management

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Innovative Chinese transaction wins Weather Risk Management Deal of the Year award


It’s that time of year again when our good friends at Environmental Finance announce the winners of their annual awards for companies and deals within the sectors their magazine and website covers. Of particular interest this year is their selection for the Weather Risk Management Deal of the Year. The winner is a weather risk transaction from China which saw reinsurer Swiss Re help a hydropower company hedge some of its precipitation related risks.

It’s particularly interesting and innovative due to its location as the Chinese weather risk management market can hardly be called mature. In fact the insurance, reinsurance and risk transfer market as a whole in China is still finding its feet, particularly when it comes to catastrophe or weather risks. So the fact that Swiss Re managed to get this deal off the ground in a country which doesn’t really have a weather risk market is groundbreaking and could help to open up China to further use of weather risk management and risk transfer solutions.

China is extremely exposed to weather risks and as penetration of weather and catastrophe risk transfer and insurance tools increases there will also be a growing need for reinsurance cover for risks in the country. As such, any developments in China must be of interest to Artemis readers looking for where growth in the markets we cover is likely to occur.

This particular transaction saw Swiss Re structure an index-based precipitation deal for Guangdong Meiyan Hydropower, a Shanghai Stock Exchange-listed company who operate five hydroelectric stations in Guangdong province providing power to a heavily industrialised region of China. As such Guangdong Meiyan Hydropower is extremely exposed to precipitation risks such as a shortage of rainfall as it means their power production falls and with it their profits. So protecting themselves against a lack of rainfall is vital and droughts in China in 2009/10 showed the impact this can have on hydro companies profits.

The winning transaction involved Guangdong Meiyan taking out the first precipitation index-based insurance deal in China. They arranged this policy with local insurance firm Dinghe Property Insurance, paying RMB7.2 million ($1.1m) for a policy with a maximum payout of RMB80 million. The deal which covers the 2012 calendar year was structured by Swiss Re Corporate Solutions who also acted as reinsurer.

This was the first weather index insurance hedge ever purchased by an energy company in China. Interestingly Swiss Re said that there was sufficient data to structure the deal, it has often been said that China lacks historical data to enable a weather risk market to flourish. Swiss Re hopes that the success of this transaction will encourage other energy companies in China to look to weather risk management solutions to protect their earnings. They also intend to investigate ways to bring weather risk products to China’s growing wind energy sector as well.

The potential for weather risk protection in China, and across the rest of Asia, is huge. Similarly catastrophe risk protection will be a growing area as insurance penetration increases. Given the potential size of these exposures and the rapid development of Asian cities and infrastructures, the weather risk and re/insurance markets are going to see opportunities to profit in these areas increasing.

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