Uruguay’s state-run electric utility, UTE, has signed an 18-month insurance policy with the World Bank that pays up to US$450m when low rainfall forces the South American country to buy more expensive imported oil for power generation.
UTE currently generates about 80% of its energy from hydropower and droughts in two of the past five years have proved costly by restricting its hydroelectric output. Last year, water shortages and resulting increased oil imports cost the company about US$450m more than it had originally budgeted for electricity production that year. UTE had to borrow money, resort to Uruguay’s energy stabilisation fund, and raise electricity prices to cover the shortfall.
Madelyn Antoncic, World Bank vice-president and treasurer., said that the insurance “is appropriate for risks that have a low probability of happening, but cause high losses”. She believes other developing countries that have expressed interest in weather and natural disaster insurance will follow Uruguay’s lead. The bank’s technical expertise and triple-A credit rating can help them obtain this kind of insurance at “very favorable terms,” Antoncic added.
The World Bank structured the Uruguayan policy, with Swiss Re and a partnership between Allianz and Bermuda-based Nephila Capital Ltd. as reinsurers. It estimates that at current oil prices, a repeat of Uruguay’s worst-ever drought would cost its government up to US$1bn. The Bank is developing a range of financial products to shield governments in developing countries from the costs of natural disasters as part of its goal to promote sustainable development.
In 2008, Malawi purchased World Bank-backed insurance that covers part of the cost of importing food if low rainfall cuts corn production in the East African country. The Bank has also developed natural disaster insurance programmes for Pacific Rim and Caribbean countries.
In a separate development, Uruguay was named ‘Country of the Year’ by The Economist magazine. The publication praised Ireland, which “has come through its bail-out and cuts with exemplary fortitude and calm”, as well as Estonia for having the lowest level of debt in the European Union (EU).
However, the magazine commented that the accomplishments most deserving of commendation are “path-breaking reforms that do not merely improve a single nation but, if emulated, might benefit the world”. Under its “modest yet bold, liberal and fun loving” president Jose Mujica, Uruguay had enacted sensible reforms during 2013 that included legalising gay marriage and regulating the production, sale and consumption of cannabis.
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