SEG OB

S E CR E T A R A D E GO B E R N A CI N

The Mexican Disaster Risk Financing Strategy

Rubem Hofliger Topete Director General of the Natural Disasters Fund

SEG OB FONDEN

S E CR E T A R A D E GO B E R N A CI N

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. 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 th years many substantial modifications t accomplish th t th procedures b the b t ti l difi ti to li h that the d be held with maximum efficiency and opportunity.
Presenceofdisasterscausedby nature Federal Government TheNaturalDisastersFund (FONDEN) (FONDEN)wascreatedin1996 t d i 1996

SEG OB FONDEN
Purpose

S E CR E T A R A D E GO B E R N A CI N

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 d d damages caused b a natural phenomenon, whose di d by t l h h disasters magnitude t it d 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 p g, g normal programs to attend the damages caused by the disaster.

SEG OB FONDEN
Integration
I. II.

S E CR E T A R A D E GO B E R N A CI N

The FONDEN program. budget line within the Federal Budgetary Expenses of every year and works mostly as a cash transfer to the FONDEN Trust; The FONDEN Trust. financial tool which finances: i) the reconstruction of the public infrastructure and housing of low income population; ii) the acquisition of risk transfer instruments to protect its patrimony and iii) patrimony, supports for the states to develop a risk transfer strategy for their assets;
Funding mechanism: Articles 19 and 37 of the Federal Budget th F d l B d t Law

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

Risktransferinstruments

Supportstodeveloparisk transferstrategyforlocalassets t f t t f l l t

Aidsupplies acquisition

SEG OB FONDEN
Execution

S E CR E T A R A D E GO B E R N A CI N

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 infrastructure. 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 th i own resources. ith their

SEG OB FONDEN
Procedures

S E CR E T A R A D E GO B E R N A CI N

NaturalPhenomena

LocalState
Requestconfirmation fortheoccurrence ofasevere f naturalphenomena Natural

Technicalentity
Issuesanopinion regardingthe occurrenceandseverity d it ofthe naturalphenomena Opinion?
1/2

I.Geological

II.Hidrometeorological

disaster

Beginning
Negative End Positive

III.Others III Oth

NotifiestheState thathisrequest ispositive

SEG OB FONDEN
Procedures
Installationofthe damage assessment damageassessment committee Installation
LocalState

S E CR E T A R A D E GO B E R N A CI N

Ministry of Interior MinistryofInterior StateandFederal Entities Sendthelist ofurgentactions f t ti withthecosts tothe MinistryofFinances forapproval

Damageassessment committee receives the committeereceivesthe results

Eachsectorevaluates anddeterminethe amountsrequiredfor amounts required for thereconstructionand

Requesttheissue ofthenatural disasterdeclaration

LocalState

2/1

Requestforthe Request for the rapidresponse resourcestoimprove urgentactions

FederalAgencies

SHCP Authorizesthe rapidresponse rapid response resourcesto realizethe urgentactions

Issueandpublish onthenational on the national officialnewspaper thenatural disasterdeclaration

Presenttothe Committee theirpreliminary listsofworksand actionstobedone

2/3

LocalState L l St t

Askforresourcesto attendtheevaluation

Askforadvances tostartthe reconstruction

APIN

SEG OB FONDEN
Procedures
Ministryof f Finances

S E CR E T A R A D E GO B E R N A CI N

FederalEntities

SEGOB

FederalFONDENTrust NationalCommittee

Approve theadvances

3/2

FederalEntities

Starttheurgent worksand actionsforthe reconstruction withthe with the advances authorized

Reviewand presentthe finaldocuments totheMinistry ofInteriortoaccess thetotalresources forthe reconstruction

Reviseandissue apositive opinionforthe documentsof d f eachsector sotheresources canbeapproved

Authorizesthe totalresources forthe reconstructionof thefederal infrastructureand asmuchas50% h 50% ofthelocal infrastructurefor thefederal entitiestoattend. Meanwhilethe Meanwhile the Stateswilltake careofthe other50%

End

Natural Disasters Prevention Fund SEG OB FOPREDEN

S E CR E T A R A D E GO B E R N A CI N

Global Strategy
One of the main targets of the Mexican Government is precisely to transit from a di f disaster reactive system t a preventive system. t ti t to ti t 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 ( ); y , y 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 2010, 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 resources to attend the damages caused by natural disasters.
Reactive

Preventive

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ChallengesE andDpriorities S E CR T A R A E
GO B E R N A CI N

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 th i i t the investment i prevention t t in ti

TODAY
Prevention 2005-2010 FOPREDEN US$118 MD
$20 MD average p prevention investment per year
DISASTER

Reconstruction 2005-2010 FONDEN US$4,731 US$4 731 MD

$789 MD average reconstruction resources per year

Balance:
Not i N t investing in prevention lead to excessive material and social costs which also compromise ti i ti l d t i t i l d i l t hi h l i the sustainable development of our country.

SEG OB

Challenges Eand Dpriorities S E CR T A R A E

GO B E R N A CI N

TOMORROW
Prevention
FOPREDEN ... main financial instrument to
invest in prevention
DISASTER

Reconstruction

FONDEN
... diminish Investment in prevention per year: Average loses per year:

20% of the average losses

Balance:

$ minimum

The Th prevention, understood as an investment, will represent in the near f t ti d t d i t t ill t i th future substantial b t ti l savings, which could be used in the development and economic growth.

SEG OB Preventive aspects of FONDEN

S E CR E T A R A D E GO B E R N A CI N

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 USD$1.42 billions

2005-2010

1.42 1 42

3.05

Reconstruction USD$3.05 billions Improvements and additions: in the reconstruction budget its possible to budget, it s include mitigation actions to avoid future damages thru specific reconstruction norms that will reduce the vulnerability before future disasters.

FOPREDEN AND IMPROVEMENTS $1.42 billions $1 42 billi

Reconstruction $ 3.05 Billions

SEG OB Preventive aspects of FONDEN

S E CR E T A R A D E GO B E R N A CI N

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.

SEG OB Inventory and risk analysis

S E CR E T A R A D E GO B E R N A CI N

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 location, cost. The first stage focused on the main property affected by the natural disasters: 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.

SEG OB R-FONDEN

S E CR E T A R A D E GO B E R N A CI N

What is it? How does it work?

The Loss Estimation for Federal Risk System (R FONDEN) (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. Infrastructure data base contains geocoded information for each asset, structural characteristics and replacement values. 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.

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SEG OB R-FONDEN

S E CR E T A R A D E GO B E R N A CI N

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.

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SEG Cat 2009 OB Multi

S E CR E T A R A D E GO B E R N A CI N

Multi Cat Mexico is a catastrophic bond that provides protection for earthquake and hurricane risks The period risks. covered is three years for 2009-2012.
Multi Cat represents significant improvements with respect to Cat Mex:
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 g p g

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.

SEG Cat 2009 OB Multi

S E CR E T A R A D E GO B E R N A CI N

This instrument has a 290 million dollars coverage: 1) 140 MD for earthquakes; 2) 100 MD f h i for hurricanes coming f i from the P ifi O h Pacific Ocean, and d 3) 50 MD for hurricanes coming from the Atlantic Ocean. HURRICANE ZONES EARTHQUAKE ZONES

Central Pressure

Pacific Pacific Atlantic Zone B Zone C Zone D 944 944 920 mb mb mb

Zone A Zone B Zone C Magnitude (Mw) 7.9 8.0 7.4 Depth (km) 200 200 200

SEG OB Stop Loss Coverage

S E CR E T A R A D E GO B E R N A CI N

With the same database and risk analysis done, Mexico began the develop of a risk transfer scheme for events in a bottom layer of the Multi Cat.
In this regard, during the first half of this year Mexican Government designed and placed a stop loss insurance for FONDEN. This coverage will provide protection to the public infrastructure and housing in poverty during one year from June 10th and will contribute to minimize the probability of cutting funds assigned to other important programs. All of these, in order to give a prompt response to Mexican people, affected by the occurrence of natural disasters disasters. The coverage contracted is unique in its type by an emerging country to transfer natural disasters risks risks.

SEG OB Stop Loss Coverage

S E CR E T A R A D E GO B E R N A CI N

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
FONDEN
1.4 bd

Agroasemex is the insurer and the coverage will be valid for one year from June, 2011 to June, 2012. Retention. The first losses up to 1 billion dollars accumulated in the year will be paid by FONDEN. Capacity: 400 million dollars would be paid by the international reinsurance market in excess of 1 billion dollars paid by FONDEN. Excess: In case of losses in excess of 1.4 billion dollars, FONDEN will pay it.

CapacityoftheXLCoverage Capacity of the XL Coverage

1 bd

FONDENRetention FONDEN Retention

0 md

Federalagenciesinsurancepolicies:SSA, Federal agencies insurance policies: SSA SEP,CONAGUAandSCT

Disaster Risk SEG OB Financing Strategy

S E CR E T A R A D E GO B E R N A CI N

FONDEN,FISCAL BUDGET,CONTINGENT BUDGET, CONTINGENT CREDIT

XLINSURANCECOVERAGE XL INSURANCE COVERAGE

$$$$

400MD 400 MD 2.39 BILLIONDLLS

290MD

CA ATBOND

FONDEN
SCTSSAPACC SEPCONAGUA

1BD 1 BD

700MD

SEG OB

S E CR E T A R A D E GO B E R N A CI N

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