# Global risk pooling mitigates financial risk from drought in hydropower-dependent countries

## TL;DR

The paper proposes using global risk pooling through index insurance to reduce financial risks from drought in countries that rely heavily on hydropower.

## Contribution

The novel approach uses remotely sensed data to design pooled index insurance contracts, demonstrating significant cost savings.

## Key findings

- Pooling index insurance contracts reduces costs by 54% compared to individual risk management.
- Low drought correlations between countries allow for effective risk diversification through global pooling.

## Abstract

More than 50 countries rely on hydropower for over 25% of their electricity generation, making them vulnerable to drought and resulting revenue losses. Governments can offset financial losses for publicly-owned hydropower generators, but this can create fiscal pressures and lead to negative consequences, such as lower bond ratings. Index-based financial instruments, used to manage weather-related risk, offer an alternative, though data collection and index design are challenging. Using remotely sensed hydrometeorological data, we develop index insurance contracts to manage drought-related financial risk for hydropower-dependent countries. Low correlations in drought across these countries allow cost reductions when risks are pooled. Pooling the contracts yields average savings of 54% compared to individual risk management via reserves. These findings indicate that pooled index insurance can strengthen financial resilience in countries dependent on hydropower and support governments in mitigating drought-related economic risks.

Using remotely sensed hydrometeorological data, the study designs index insurance contracts for hydropower-dependent countries. Pooling them globally cuts costs by 54%, strengthening financial resilience and helping governments manage drought-related economic risks.