A new brief for action has called on the insurance market to play its part in reducing risks for hydropower players in the face of drought across the region.
“From Exposure to Protection: The Case for Parametric Insurance Revenue Cover for Hydro-Dependent Utilities in Eastern and Southern Africa” discusses how hydropower supports economies and essential services across the region, yet many utilities lack financial protection against climate-driven revenue losses.
When generation falls, the consequences reach far beyond the power station: higher electricity costs, pressure on public budgets, and disruption for businesses and households.
Report authors Robin Nizou and Céline Boulay, both of the AFD Group’s IDRIMA Facility, explain that at the CDRFI Africa Forum, the Agence Française de Développement (AFD) launched a new paper through their Integrated Disaster Risk Management Alliance (IDRIMA) with the Insurance Development Forum (IDF).
Parametric insurance
Now this Brief for Action sets out how parametric insurance can provide rapid liquidity when pre-agreed climate or hydrological thresholds are reached, helping utilities manage revenue shortfalls and reducing pressure on public finances and electricity tariffs.
Hydropower accounts for more than 17% of electricity generation across Africa and more than 80% in countries such as the Democratic Republic of the Congo (DRC), Ethiopia, Malawi, Mozambique, Uganda and Zambia. This dependence makes electricity supply, public finances and sovereign creditworthiness directly vulnerable to hydrological variability, a risk that climate change is making more frequent, more severe and increasingly unpredictable.
The brief stresses “The cost of that exposure is already being paid and it is paid in ways that never appear as an insurance claim. When drought struck Zambia in 2024, usable storage at the Kariba Dam fell below 3%, load shedding reached 21 hours a day and the growth projection for the year was revised down from 4.7% to 2.3%.”
“When Uganda’s hydropower output halved in 2005–2006, the production gap reached nearly half of national demand; consumers ended up paying the highest tariffs in the region, while the state-owned transmission company was still subsidising supply.”
Call for structured financial protection
It warned that in each case the shock arrived unbudgeted and was absorbed by tariffs, by budget, or both. Despite this exposure to hydrological variability, the vast majority of African hydropower utilities carry no structured financial protection against drought-driven revenue shortfalls or excess-rainfall disruptions.
The authors said that when shocks occur the losses cascade from the asset, to the system operator, to the ministry of finance and ultimately to countries’ credit ratings and borrowing costs.
They believe “The alternative is not to eliminate the shock but to convert it into a known annual cost, arranged in advance, that delivers liquidity in the year it is needed without adding to the debt stock.”
IDRIMA, a joint initiative of the AFD Group and the Insurance Development Forum, offers a structured response, they said.
Through three sequential phases: risk assessment, solution design and placement, IDRIMA works with governments, state-owned utilities and development banks to move from exposure to protection.
Conceived as a follow-up to the IDF Practical Guide to Insuring Public Assets, this Brief for Action makes the case for accelerating deployment of climate risk transfer solutions, explains the mechanisms and their limits, and sets out concrete actions for each category of public institution.
Zanzibar declaration
It follows the Zanzibar Declaration, in which 12 national insurance regulators from eastern and southern Africa committed, among other things, to promoting the insurance of critical and strategic infrastructure. It is addressed to ministries, utilities, energy regulators, insurance regulators and all stakeholders concerned with protecting strategic public assets and revenues, with a particular focus on eastern and southern Africa.
The Zanzibar Declaration committed the 12 insurance supervisors to developing enabling frameworks for critical infrastructure insurance and to establishing regional risk pooling mechanisms.
Translating that commitment into placeable products requires decisions that no single actor holds, the brief found, suggesting the following actors should consider the proposals below: Power utilities and state-owned enterprises are invited to initiate a climate risk and insurance readiness assessment before the next hydrological shock arrives. Analysis at system level, rather than asset level, is what makes revenue protection possible, and it requires generation, hydrological and contractual data that only the utility holds.
Ministries of Finance are invited to integrate parametric energy risk transfer into national disaster risk financing strategies, and to consider pre-arranged cover for critical infrastructure alongside reserves and contingent credit. The IMF has recommended precisely this for Zambia, advising that climate risks be more fully reflected in the Fiscal Risk Statement, and that insurance schemes be promoted in vulnerable sectors. What such cover protects is its stressed coverage ratio, and by extension the sovereign guarantee standing behind it.
Energy regulators are invited to clarify whether, and on what terms, a climate risk transfer premium qualifies as an eligible cost within a regulated utility’s revenue requirement. This is the single determination that decides whether protection outlives the funding that seeded it. Without it, a placed policy is a pilot; with it, tariff volatility for households and industry becomes something a regulator can actively manage rather than absorb after the fact.
Four key questions
Insurance regulators are invited to address four questions that recur in every engagement of this kind.
- The first is legal characterization: whether a parametric revenue contract constitutes insurance, a derivative, or a distinct regulated class, and on what conditions insurable interest and the indemnity principle are satisfied where no loss is adjusted. Settling this in advance, rather than product by product at approval stage, is the change that would most accelerate deployment.
- The second is a disclosure standard for basis risk: that any parametric product covering a public asset or public revenue be accompanied by a published back-test of the index against historical generation, stating the years in which it would and would not have triggered. IDRIMA applies this standard in its own engagements and would support its adoption as a market requirement.
- The third is index governance: the independence of the calculation agent, the treatment of revisions or discontinuation of the reference dataset, the fallback source, and the dispute resolution route. These are the terms on which parametric contracts fail in practice, as the regional record shows.
- The fourth is the relationship between regional pooling and domestic market development. These are frequently presented as competing objectives and need not be.
Supervisors can set the terms on which cross-border placement is permitted, including local fronting, a retention ladder that grows with domestic capacity, and technical transfer attached to cession approvals. An anchored insurance pool built on those terms strengthens local markets rather than bypassing them.
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