Swiss Re CorSo and Aon deliver parametric cover to Nepal renewable energy project

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.

Around 70km northeast of Kathmandu is the location of one of the largest foreign direct investments in Nepal, the Upper Trishuli-1 Hydropower Project, designed to harness the power of the Trishuli River to create a 216 MW greenfield run-of-river hydropower project.

It’s expected that the project will greatly boost Nepal’s renewable energy production, but progress was severely hindered by the 2015 Nepal earthquakes, which also resulted in a reluctance of traditional insurers to provide earthquake cover in the location of the dam, which in turn affected the investment potential.

The project is co-financed by a consortium of nine multilateral development banks and development finance institutions, led by the IFC.

However, explains Swiss Re Corporate Solutions, sponsors and financers had to look at alternative coverage to secure the financing for this project.

By working closely with Aon and the IFC, Swiss Re Corporate Solutions was able to structure a parametric insurance cover that met the needs of all stakeholders, which ultimately enabled the project to move forward.

The solution is triggered by the shaking intensity at the project site and is based on shakemaps provided by United States Geological Survey (UGCS) after a major quake.

It provides certainty for the full five-year construction period, and importantly allows the flexibility of adjusting the insured values year-on-year to reflect any delays of changes in the construction process of the project.

Loredana Mazzoleni Neglén, Head Global Customer and Distribution and Innovative Risk Solutions, Swiss Re Corporate Solutions, commented, “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.”

Veronica Scotti, Chairman Public Sector Solutions, Swiss Re, added, “Development Finance Institutions’ mandate to stretch the market provides a powerful incentive to consider innovative approaches. The use of a parametric insurance to enable long-term project financing speaks to these lenders’ willingness to think outside-of-the-box.”

It’s actually the first time that the IFC and other multilateral development banks have agreed to finance a construction project backed by parametric insurance, with the cover also approved by the Insurance Regulatory Authority of Nepal.

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 Probably Maximum Loss modelling – 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.

This solution is an example of how parametric insurance can be leveraged to help close the financing gap for critical renewable infrastructure, ultimately making the world more resilient.

What’s more, this Nepal case shows the value of parametric insurance and is a blueprint that can be replicated to enable financing for other projects in places exposed to natural catastrophes.