January 18th, 2017

Public Sector Risk Financing Perspectives in Latin America: Part I

Posted at 1:00 AM ET

aidan-pope-headshot-smAidan Pope, Managing Director

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Globally, three of the ten most costly natural disaster events in the last 35 years occurred in total or in part in the Latin America/Caribbean region (1). As the region’s population, urbanization and gross domestic product concentration continues to grow, the effects of climate volatility are likely to further increase the impact of natural perils losses on economies that are already struggling. We are just now assessing the losses from Hurricane Matthew in the Caribbean. The ultimate costs of these catastrophe event responses causes a strain on public balance sheets and an increase in public debt, ultimately burdening taxpayers.

The Maule, Chile, earthquake of 2010, incurred an economic loss of USD 32 million and the Chilean government ultimately assumed 75 percent of the cost. The portion of loss covered by insurance was relatively high even by developed world standards, but there was significant opportunity for the private sector to further reduce the state’s financial burden.

earthquake-pics-2Many recent catastrophe events in the Latin America/Caribbean region provide examples of the protection gap: Only five percent of the economic loss of USD 8 billion from the 2010 earthquake in Haiti was insured; the insured portion of the economic loss of USD 3 billion caused by the April 2016 earthquake in Manta, Ecuador, is expected to reach no more than 15 percent. The 2016 earthquake has deeply impacted the local economy and government finances as unemployment increased by approximately 50 percent and the government was compelled to increase sales taxes by two percent in order to fund national reparation and recovery costs.

Given the overall impact of catastrophes on public sector finances, governments in Latin America are transitioning from an over-reliance on post-event disaster financing to a pre-event approach to disaster risk mitigation and supporting a “building back better” concept. Societies are realizing that transferring risk to the private sector provides efficient and cost-effective solutions that relieve already strained public sector budgets.

The Mexican Federal Government’s risk management strategy includes pre-event and post-event approaches. Following the 1985 Mexico City earthquake, the Mexican National Civil Protection System (SINAPROC) was created; it was established as a multi-level system integrating stakeholders from the three levels of government, the private and social sectors, academia and scientific organizations. Its initial purpose was to provide an institutional framework for the improved coordination of emergency response. Beginning in 1986, the Mexican government developed SINAPROC’s capacities in the areas of risk assessment, early warning, preparedness and disaster risk financing (2).

Link to Part II>>

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Note:

Ecuador earthquake observations extracted from Franco et al. (2017) “The April 16 2016 Mw7.8 Muisne Earthquake in Ecuador - Preliminary Observations from the EEFIT Reconnaissance Mission of May 24 - June 7,” Proceedings of the 16th World Conference on Earthquake Engineering, Santiago, Chile, Jan 9-13, 2017.

1. Munich Re NatCatSERVICE, 2016.

2. OECD Website: Review of the Mexican National Civil Protection System.

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