The World Bank and International Finance Corp. are jointly planning to facilitate a market for weather derivatives. Ulrich Hess, economist at the IFC in Washington, said the development of a liquid weather derivative market led the two institutions to dust off an earlier study by the International Food Policy Research Institute, which showed such coverage would promote economic stability. Panos Varangis, senior economist at the World Bank, said back dated analysis shows revenue from cereal crops in Morocco would have been 30% more stable between 1979-99 if local farmers had used weather derivatives. The first transaction is expected to close in Morocco next spring.
The World Bank wants to work with local insurance companies to market weather insurance under written with derivatives contracts from a first-tier weather derivatives house, such as Axia Energy or Société Générale. Varangis hopes to select the weather derivatives house in the next four months. Farmers, agri-businesses and banks with exposure to these sectors will be the main users.
"Everyone would be delighted to do this," enthused Diego Wauters, executive director and global head of insurance and weather derivatives at SG in London. Wauters declined comment on discussions between SG and the World Bank. Bill Gebhardt, director of weather derivatives for Axia Energy Europe in London, said it has discussed the project with the World Bank and is interested. Participation would help diversify the power company's weather derivatives risk book, which could potentially lower the cost of other weather contracts, he added.
One obstacle to the development of these products in emerging markets is the low quality of historical weather data. However, Varangis said the World Bank has access to historical data gleaned by satellites for the relevant regions for the last five years. The World Bank project will start in Morocco and Mexico and spread to Tunisia, Nicaragua, Turkey, Philippines and South Africa.
Varangis said some farmers in the designated areas already use crop insurance, but this is problematic since, as the pay out steps up according to the extent of the damage, farmers have a disincentive to rescue damaged crops.