World Bank research and sector work and IFC transactions - or: Synergy at work The Experience of Weather insurance derivatives in Emerging Markets Finance Forum 2002 Ulrich Hess, IFC Agribusiness

The problem: Poor agricultural risk management – e.g. Morocco Morocco’s rainfall dependence Little access to risk management instruments Traditional crop insurance has moral hazard, adverse selection and cost problems and needs to be subsidized Weather index - based crop insurance overcomes these problems if basis risk can be managed

Partial solution: weather risk management – Example: weather insurance for cereals Moroccan weather index insurance to cover cereal yields –Premium: 12% of maximum payout of US$100, indemnification threshold: 300mm (82% of mean of the index), payout: US$0.50 per mm of rainfall deficit

New IFC Weather Risk Management projects approved by the Board Global Weather Risk Facility with global weather risk market maker (GWRF) –IFC participation diversifies Aquila weather book into emerging markets –IFC provides contingent capital of max. $10m –Investors + deal originators: Aquila ($20m), reinsurers, international Banks SGRI - Moroccan Weather Risk Management Company –will be the first emerging market insurance company to offer weather index insurance on a commercial basis to banks and farmers –will retain max. 10% of the risk –Technical Partner: Agricultural Risk Consultants (brokerage company), major insurance company

(Re)insurance structure Farmer/cooperative Insurance Company Reinsurance company Weather insurance contract Reinsurance treaty Morocco Global Weather risk market maker Retrocedes as a derivative International Agricultural Bank Link to credit Risk Transfer Structuring

Barriers to Market Entry Future: continuous joint World Bank/IFC work Data problems Regulatory framework Counter party risk World Bank ESW, dialogue with WRMA, transactions precedents, TA for regulatory studies, government policy dialogue Comfort clients - IFC intermediation

Weather Risk Projects Genesis Academic Paper published by IFPRI Development Marketplace project Feasibility Studies in Morocco, Tunisia, Nicaragua and Ethiopia ESW in Mexico IFC project preparation in Morocco, later Mexico IFC Trust Fund funded business plans in Morocco (and later Mexico) IFC transactions Replication across the World Bank Group

Lessons Team work across the WBG at all stages One focal person only in World Bank Understand respective mandates and constraints Continuous commitment and ownership at various degrees from IFC and World Bank