The Mexican Disaster

Risk Financing Strategy

Rubem Hofliger Topete
Director General of the Natural Disasters Fund

Mexican Insurance Day. London March 13, 2012

 Financial instruments to prevent and
attend natural disasters

Disaster Prevention Emergency and/or Disaster

(before) (meanwhile and afterwards)

FOPREDEN FONDEN

Programmed actions Urgentactions Immediate Fund Reconstruction

Months to Days To Hours, Days Days, Weeks to

years Weeks to Weeks Months
How it is detonated? How it is detonated?
EMERGENCY DISASTER
DECLARATION DECLARATION
phenomenon
Occurrence
of the

AID SUPPLIES
FONDEN New Reconstruction
FOR THE
resources Fund for local
POPULATION
entities

All federal plans and programs are activated in order to attend the disaster
 FONDEN
Background
In attention to the governments concerning to increase their
capacity to attend the damaged caused by natural phenomena
without altering the public finances, by 1996 the Natural
Disasters Fund (FONDEN) was created.
Although with the FONDEN constitution the trouble related to avoid a lead off on
the regular programs resources was in a way solved, there were not a legal
regulation which provides the correct control and transparency in the money
application; therefore in 1999 the first FONDEN rules were issued, which has had
over the years many substantial modifications to accomplish that the procedures be
held with maximum efficiency and opportunity.
Presenceofdisasterscausedby TheNaturalDisastersFund
nature (FONDEN)wascreatedin1996

Federal
Government
 FONDEN
Purpose

The FONDEN is a financial tool composed by many instruments and driven by

various Federal Government Agencies which participates in their operation, which
has as a main purpose to provide resources to the 32 Mexican States and to the
Federal Agencies (that are in charged of federal infrastructure) to attend the harm
and damages caused by a natural phenomenon, whose disasters magnitude
overcame their capacity of response with their own budget.

Its a federal program which provide support in a complementary way to resources

destined originally to attend natural disasters. Therefore, to get the resources
approved its necessary that the federal and local entities justified that the disaster
surpasses their financial standing, with regard to not have sufficient resources in its
normal programs to attend the damages caused by the disaster.
 FONDEN
Integration

I. The FONDEN program. budget line within the Federal Budgetary Expenses
of every year and works mostly as a cash transfer to the FONDEN Trust;

II. The FONDEN Trust. financial tool which finances: i) the reconstruction of Funding mechanism:
the public infrastructure and housing of low income population; ii) the Articles 19 and 37 of
acquisition of risk transfer instruments to protect its patrimony, and iii) the Federal Budget
supports for the states to develop a risk transfer strategy for their assets; Law

III. The Immediate Fund for humanitarian aid. which is financed by the
FONDEN program and/or the FONDEN trust indistinctly;

Reconstruction

Risktransferinstruments

Supportstodeveloparisk
transferstrategyforlocalassets

Aidsupplies
acquisition
 FONDEN
Execution

The Ministry of Interior is the coordinating instance of the process, since the occurrence of
a natural disaster until the approval of the resources, as well as monitoring the correct
application of the resources in each and every reconstruction program, no matter if its
federal or local infrastructure. The execution of the reconstruction correspond to the
Federal Entities and the Local States.

To attend the federal infrastructure, all the resources will be provided thru FONDEN. The
fiduciary of the FONDEN Trust is in charge of delivering the approved resources to the
contractor businesses of the Federal entities according to the reconstruction advances.

For the local infrastructure and the housing of low income population, once the damage
assessment is concluded, the States have to sign an agreement with the federal
government in which they will let the federal entities reconstruct 50% of the damaged
infrastructure and housing with FONDEN resources and they will be in charge of the other
50% with their own resources.
 FONDEN
Procedure

NaturalPhenomena LocalState Technicalentity

Requestconfirmation Issuesanopinion
I.Geological fortheoccurrence regardingthe
ofasevere occurrenceandseverity
naturalphenomena ofthe
naturalphenomena
Natural
disaster Opinion?
II.Hidrometeorological

Beginning 1/3
Negative
End

III.Others Positive

NotifiestheState
thathisrequest
ispositive
 FONDEN
Procedure
Installationofthe Damageassessment
damageassessment MinistryofInterior committeereceivesthe
committee results
Installation StateandFederal
LocalState Entities Eachsectorevaluates
Sendthelist anddeterminethe
Requesttheissue amountsrequiredfor
ofthenatural ofurgentactions
thereconstructionand
disasterdeclaration withthecosts
tothe
MinistryofFinances
LocalState Presenttothe
2/3 forapproval Issueandpublish 2/3
Committee
Requestforthe onthenational theirpreliminary
rapidresponse officialnewspaper listsofworksand
resourcestoimprove thenatural actionstobedone
urgentactions SHCP disasterdeclaration
FederalAgencies
Authorizesthe
rapidresponse LocalState
resourcesto
Askforresourcesto Askforadvances
realizethe
attendtheevaluation tostartthe
urgentactions
reconstruction

APIN
 FONDEN
Procedure
FederalFONDENTrust
Ministryof FederalEntities SEGOB NationalCommittee
Finances

Approve Authorizesthe
theadvances totalresources
Reviewand
presentthe forthe
finaldocuments Reviseandissue reconstructionof
totheMinistry apositive thefederal
3/3 FederalEntities End
ofInteriortoaccess opinionforthe infrastructureand
thetotalresources documentsof asmuchas50%
Starttheurgent forthe eachsector ofthelocal
worksand reconstruction sotheresources infrastructurefor
actionsforthe canbeapproved thefederal
reconstruction entitiestoattend.
withthe Meanwhilethe
advances Stateswilltake
authorized careofthe
other50%
 Natural Disasters Prevention Fund
FOPREDEN
Global Strategy

One of the main targets of the Mexican Government is precisely to transit

from a disaster reactive system to a preventive system.
To accomplish that, by 2004 two prevention programs were implemented: i)
the Preventive Trust (FIPREDEN), and ii) the Natural Disasters Prevention
Fund (FOPREDEN); which can be used by federal entities, as well as by the
Mexican States for the execution of preventive projects, focusing on risk
reduction, eradicate vulnerability and exposition of public infrastructure and
dwellings of low income population.
In December of 2010, we accomplished to merge both instruments in one
new and strong FOPREDEN, in order to collect the benefits of both and to
strengthen their capacity and enhance its resources.

With more resources invested in prevention, we

are achieving to avoid large disbursements of Reactive Preventive
resources to attend the damages caused by
natural disasters.
 FOPREDEN
Preventive Actions subject to be financed

Actions focused in the identification and evaluation of hazards,

vulnerabilities and risks;

Actions focused in the risk reduction and the mitigation of the

damages caused by the impact of natural phenomena and to
avoid the risk social construction process, and

Actions to strength the preventive capacities of the population

and self protection before risk situations.
 Challenges and Priorities
1. The Preventive Action and the Disaster Risk Management as
the central key.
2. Strengthening of the existent financial instruments.
Seek in a medium time, to merge FONDEN with FOPREDEN, which purpose will be to finance and
support the prevision, risk identification, prevention, mitigation, preparedness, emergency
attention, recovery and reconstruction, all under one legal regulation and according to the DRM
concept, putting the efforts altogether.

3. Strengthening the flexibility, transparency and control in the

resources approval and their exercise.
 Challenges and priorities

The preventive action and the disaster risk management as the key element.
How much have we invested in the prevention field?
Between 2005 and 2010 there is a wide gap between the disbursement in reconstruction
against the investment in prevention
TODAY
Prevention DISASTER
Reconstruction
2005-2011 2005-2011

FOPREDEN FONDEN
US$140 MD US$5.2 BD

$20 MD average $742 MD average

prevention investment reconstruction

per year resources per year

Balance:
Not investing in prevention lead to excessive material and social costs which also compromise
the sustainable development of our country.
 Challenges and priorities

TOMORROW

Prevention DISASTER Reconstruction

FOPREDEN
... main financial instrument to
invest in prevention
FONDEN
... diminish
Investment in prevention per year:
Average loses per year:

$ minimum
20% of the average losses Balance:
The prevention, understood as an investment, will represent in the near future substantial
savings, which could be used in the development and economic growth.
 Preventive aspects of FONDEN

1. Improvements and additions.

2. Risk transfer instruments.
3. Local state funds.
4. Specialized equipment to prevent
and attend natural disasters.
 Preventive aspects of FONDEN

While we managed to balance this huge gap between ex-post resources and ex-ante,
we keep adapting the reaches of FONDEN, so, even as a reactive instrument, it can
finance diverse aspects focused in risk reduction, like:

1. Improvements and additions

FOPREDEN AND IMPROVEMENTS VS RECONSTRUCTION
FOPREDEN and improvements 2005-2010
USD$1.44 billions

1.42
1.44

3.9
3.05

Reconstruction USD$3.9 billions

FOPREDEN AND
Improvements and additions: in the IMPROVEMENTS
reconstruction budget, its possible to
$1.44 billions
include mitigation actions to avoid future Reconstruction
damages thru specific reconstruction $ 3.9 Billions
norms that will reduce the vulnerability
before future disasters.
 Preventive aspects of FONDEN

2. Risk transfer instruments

Since 2004, the Mexican Government has been working intensely with the private
sector in the design of different strategies to protect the FONDEN patrimony and
transfer its risks to the international market (i.e. cat bonds, parametric schemes, loss
of excess insurances, etc.), as well as encouraging and providing incentives to the
local states to insure their assets and infrastructure, in order to gradually decrease
the impact on federal and local budgets when a natural disaster of large proportions
occurs.
The target in a medium period of time is for the FONDEN budget to be destined
mostly to pay for the risk transfer instruments and retain a small amount to attend the
most frequent but less destructive events. By this way we will have enough resources
to invest in the disaster risk reduction thru the preventive instruments, without
affecting the public finances.
 Cat-Mex

In May 2006, the Mexican Government subscribed the first

catastrophic bond issuance in Latin America (Cat Mex).
Mexico searched a new scheme to complement FONDEN
through the financial markets.

Cat Mex was a combination of a parametric reinsurance policy and a

cat-bond covering earthquakes in specific zones of the Mexican territory,
which consequently provides protection to FONDEN trust capital.

The operation covered earthquake risk for up to 450 million dollars for
three years. An insurance claim payment is triggered if:
o Theres an official state of emergency or state of disaster
declaration issued by the Ministry of Interior, and
o An earthquake with the specified magnitude and depth is recorded
with its epicenter located in specific zones.
 Inventory and risk analysis

Since 2007, the Mexican government has worked on the creation

of databases and risk analysis in order to have more technical
elements that support the design of risk transfer instruments that
complement FONDEN.
The results of this effort allowed to obtain two essential elements to design risk
transfer mechanisms:
1. A database of main public assets and infrastructure including aspects like
geographical location, building characteristics and replacement cost.
The first stage focused on the main assets financed by FONDEN for the
reconstruction: roads, hospitals, schools and water infrastructure and
housing for lowincome population.

2. An analysis of the main hydrometeorological and geological risks that affect

the Mexican territory in order to determine the vulnerability of the
infrastructure.
 R-FONDEN
What is it? How does it work?
The Loss Estimation for Federal Risk System
(R-FONDEN) is a software developed by the
UNAM Engineering Institute for the FONDEN.
Its objective is the estimation of potential
material and human losses that may occur for
earthquake, flood or tropical cyclone events.
Losses are estimated for a data base
integrated with information of the main federal
public infrastructure: hospitals, schools,
hydraulic and energy infrastructure, roads and
bridges, public buildings, among others.
R-FONDEN uses for each selected area
probabilistic simulation of historical and
potential events for the natural hazards
modeled. In each simulation, losses are
estimated through vulnerability functions built
for the infrastructure in the data base.
It also allows estimations for any geographic
area, loss estimation by scenario (particular
hazard and event) or for all the events
modeled for each hazard.

Infrastructure data base contains geocoded

information for each asset, structural
characteristics and replacement values.

20
 R-FONDEN
What is it? How does it work?

R-FONDEN generates essential elements for the
design of financial risk transfer instruments:
1) Estimation of the Annual Average Loss.
2) Exceedance Probability Curve (Annual
frequency for which a certain loss amount
may by exceeded).
3) Identification of the major risk scenarios for
selected infrastructure weighted by loss
magnitude and occurrence probability.
Visualization and detail of result
information may by consulted through
GIS, allowing the creation of maps with
the location of assets with different levels
of damage or aggregate loss areas with
specific level of resolution and selected
return periods for each hazard.

21
 Multi Cat 2009

Multi Cat Mexico is a catastrophic bond that provides

protection for earthquake and hurricane risks. The period
covered is three years for 2009-2012.
Multi Cat represents significant improvements with respect to Cat Mex
2006:
o The mechanism expands coverage to Pacific and Atlantic
hurricanes.
o For the (continued) earthquake risk:
1. the level of triggers were reduced to cover more events.
2. the coverage zones were extended in order to protect a larger
population.
An insurance claim payment will be triggered with an official state of
emergency declaration issued by the Ministry of Interior and an event
occurs with the specific triggers.
 Multi Cat 2009

This instrument has a 290 million dollars coverage:

1) 140 MD for earthquakes;

2) 100 MD for hurricanes coming from the Pacific Ocean, and
3) 50 MD for hurricanes coming from the Atlantic Ocean.

HURRICANE ZONES EARTHQUAKE ZONES

 XL Coverage

With the same database and risk analysis done, Mexico

developed a risk transfer scheme to cover FONDEN in excess of
1 billion dollars.

In this regard, during the first half of 2011 Mexican Government

designed and placed an excess of loss insurance coverage for
FONDEN. This scheme was issued on June 10th, 2011 for a one year
period and provide protection to those assets covered by FONDEN
(public infrastructure and housing of low income population) and will
contribute to avoid any deviations on the public finances.

All of these, in order to give a prompt response to Mexican people,

affected by the occurrence of natural disasters.

The coverage contracted is unique in its type by an emerging country

to transfer natural disasters risks.
 XL Coverage

With the participation of about 20 international reinsurance

institutions a coverage of 400 million dollars was placed to
protect the FONDEN patrimony on its aggregate losses
Agroasemex is the insurer and the
coverage will be valid for one year from
FONDEN
June, 2011 to June, 2012.
1.4 bd
Retention. The first losses up to 1 billion
CapacityoftheXLCoverage dollars accumulated in the year will be
1 bd
paid by FONDEN.

Capacity: 400 million dollars would be

FONDENRetention
paid by the international reinsurance
market in excess of 1 billion dollars paid
0 md
by FONDEN.
Federalagenciesinsurancepolicies:SSA,
SEP,CONAGUAandSCT Excess: In case of losses in excess of 1.4
billion dollars, FONDEN will pay it.
 Disaster Risk
Financing Strategy

FONDEN,FISCAL
BUDGET,CONTINGENT $$$$
CREDIT

CATBOND XLINSURANCECOVERAGE 400MD

290MD
2.39
FONDEN 1BD BILLIONDLLS

SCTSSAPACC
700MD
SEPCONAGUA
 Conclusions

1. We must continue promoting legal reforms to incorporate the disaster risk management concept as a
national public policy in all national plans, programs and projects regarding public and private infrastructure in
our country, in order to achieve that the investment be applied according to a permanent risk reduction strategy.

2. We must keep fortifying the financial instruments for the prevention of natural disasters, until we obtain the
balance between the cost to attend the disasters and the investment applied in prevention and disaster risk
reduction;

3. We have to carry on a permanent work of massive diffusion and training about the disaster risk reduction and
the prevention and self-protection culture, in order to grow day by day in the society the knowledge of these
concepts, so it can be introduced in their daily practices;

4. We need to conclude the transit from an intervention of the authorities based on the disaster as the center of
all the actions, to other sustained in the analysis and understanding of its generator that is the presence of the
risk, and

5. Manage to accomplish a complete risk transfer administration of the natural disasters to which Mexico are
exposed, looking for its diversification between the different financial instruments available in the international
market, so before the presence of catastrophic disasters, the national public finances are not affected and
therefore our economic stability and development.
THANK YOU

Rubem Hofliger
Natural Disasters Fund Director General
rhofliger@segob.gob.mx
www.proteccioncivil.gob.mx
Phone. (52 55) 51280208
Fax. (52 55) 30032900 ext. 11709