Closing the gap Comprehensive disaster risk management in Mexico

Mexico has been hit by no less than seven major catastrophes since 1985. In 2005 Hurricane Wilma caused total economic damages of over USD 22 billion ‒ more than USD 8 billion of which were uninsured. Small wonder that the federal government has been an innovator in disaster risk management.

case study Macro Mexico

FONDEN ´excess of loss´ reinsurance structure

Established: 2011

Insured perils: Declared natural disaster (eg flood, hurricane, earthquake)

Instrument: Indemnity insurance (USD 250 m)

Covered goods: Federal, state and municipal infrastructure; housing of low income population

Risk takers: Swiss Re and a consortium of reinsurers

MultiCat ‒ Catastrophe risk cover

Established: 2009

Insured perils: Earthquake, hurricane

Instrument: Parametric catastrophe bond (USD 315 m)

Triggers: Quake magnitude/barometric pressure

Swiss Re’s role: Swiss Re acts as co-lead manager and joint bookrunner The Mexican government’s incentivised to take responsibility for drive to introduce effective their own recovery and preparedness. About Swiss Re disaster risk management Examples of this are the Mexican The Swiss Re Group is a leading states of Oaxaca, Colima and Hidalgo. wholesale provider of reinsurance, began in 1986 in the after- Having analysed the vulnerability insurance and other insurance-based math of the earthquake of of their public sector infrastructure to forms of risk transfer. September 1985. What natural hazards, these states decided policymakers envisioned to take advantage of a FONDEN- Dealing direct and working through was the creation of a sponsored risk management brokers, our global client base programme (EGIR) that helps states consists of insurance companies, national disaster relief fund. develop sound risk management mid-to-large-sized corporations Ten years later that vision strategies, leading to the creation and public sector clients. came to life as the Fund for in 2016 of the first FONDEN States Natural Disasters (FONDEN), Pool where Swiss Re is the main risk From standard products to tailor- which receives dedicated taker. Other Mexican states are also made coverage across all lines of support every year from the looking to develop an EGIR to assist business, we deploy our capital them in the structuring of their strength, expertise and innovation federal budget. insurance coverage. power to enable the risk-taking upon which enterprise and progress in FONDEN’s risk management society depend. Over time FONDEN has evolved strategy also utilises a number of to become a world-class model sophisticated risk transfer instruments for disaster risk management. to make best use of its resources and Our expert Its reconstruction activities are provide various government governed by a policy to ‘build back agencies an umbrella of protection. better’, meaning that new public A USD 250 million indemnity-based infrastructure is more resilient than insurance policy covers the whole what’s being replaced, reducing FONDEN portfolio in excess of vulnerability to disasters over the FONDEN own budgetary funds. Rubem Hofliger long run. Senior Client Manager LatAm For costly but remote risks (the so- Global Partnerships Forward-looking prevention called ‚fat tail‘ events of catastrophic [email protected] FONDEN has also surpassed its earthquake or hurricane), FONDEN +52 55 5322 8392 original mandate by focusing has issued three-year ’MultiCat‘ risk- increasingly on prevention in addition linked securities. The 2012 – 2015 to reconstruction. With that in mind, MultiCat transferred USD 315 million FONDEN funds identification, of earthquake and hurricane risks to assessment of hazards, vulnerabilities capital markets, offering earthquake and risk quantification as well as cover over three seismic zones of the ex ante disaster risk reduction and Mexican territory, with magnitude and mitigation activities. It also provides depth measures for each. The funds to increase the risk awareness hurricane cover pays out if a storm and resilience of local communities passes through a pre-defined coastal to cope with disasters. zone (Pacific or Atlantic) and the pressure at the centre of the storm is FONDEN is mindful of its federal at or below a set level. In 2015, for role, making sure that state and example, Hurricane Patricia hit the local authorities are empowered and Pacific coast of Mexico triggering a payout of USD 50 million.

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