June 21st, 2017

Public-Private Insurance Partnerships Bolster Latin American/Caribbean Resilience: Part III: A Lesson in Resilience from Mexico

Posted at 1:00 AM ET

aidan-pope-headshot-sm24Aidan Pope, Managing Director


The Mexican federal government’s risk management strategy exemplifies a modern, resilient disaster preparedness plan, including pre- and post-event approaches and public-private partnerships. Following the 1985 Mexico City earthquake, the Mexican National Civil Protection System (SINAPROC) was created, establishing a multi-level system to integrate stakeholders from the three levels of government, the private and social sectors, academia and scientific organizations. Its purpose was to provide an institutional framework for the improved coordination of emergency response. Its capacities in the areas of risk assessment, early warning, preparedness and disaster risk financing were developed. As SINAPROC evolved, it added risk reduction practices to shift from a reactive to a preventative, holistic and integrated risk management plan.

Recognizing that risk comes from multiple factors - politics, land-use planning, cultural norms and more - SINAPROC mainstreamed the plan throughout government, private and social sectors. Through the Secretariat of the Interior, it coordinates civil protection with other key policies, such as urban development, housing, climate change and education, by clearly identifying responsibilities. SINAPROC works with the Secretariat of National Defense and the Secretariat of the Navy to implement emergency preparedness, communication and relief and recovery plans in addition to creating institutions to set policies and budgets, develop best practices, coordinate government, promote social and private-sector agreements and research scientific and technological improvements in risk management. It also aligns with the Ministry of Foreign Affairs to oversee international compliance and assistance and establishes provisions for government accountability.

SINAPROC also created the General Risk Management Directorate to oversee financial risk management instruments in conjunction with private-sector stakeholders. One such instrument was developed in 1996 to respond to a continued need for post-event budget allocations. The Fund for Natural Disasters (FONDEN) is a transparent financial vehicle by which the federal government provides pre-event funding from tax revenues for post-disaster response and reconstruction. Its resources are allocated by law, and distributions are made by the state-owned development bank from sub-accounts dedicated to specific reconstruction programs.

Through FONDEN, the Mexican government established relationships with international capital and reinsurance markets that have proven critical in accessing risk transfer schemes. In 2006 it purchased Mexico’s first catastrophe bond, Cat Mex. In 2009, it replaced Cat Mex with the MultiCat Mexico bond, expanding earthquake coverage and adding hurricane coverage. The bond was renewed again in 2012 before making a USD 50 million payment to the Mexican government for losses from 2015’s Hurricane Patricia. SINAPROC further mitigated the storm’s impact by using its early warning system to evacuate most of the affected population, resulting in only a handful of casualties despite the fact that Patricia was the second-most intense tropical cyclone on record.

In 2011, FONDEN also placed a traditional insurance program covering 100 percent of the federal government’s assets. To incentivize prevention, it covers up to 50 percent of provincial assets if municipalities implement formal risk transfer strategies. The program renewed in 2012 with over 40 international reinsurers and demonstrated considerable buying power by convincing the market to accept its own damage assessment and adjustment procedures.

This piece first appeared on BRINK.

Link to Part I>>

Link to Part II>>

Link to Part IV>>

Link to Part V>>

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*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.

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