“Mexican experience in the creation and implementation of financial instruments to prevent and attend natural disasters"

Emergency and/or Disaster (meanwhile and afterwards) Disaster Prevention (before) All federal plans and programs are activated in order to attend the disaster reconstruction FOPREDENFONDEN Days To Weeks Hours, Days to Weeks Months to years Days, Weeks to Months Immediate Fund Occurrence of the phenomenon EMERGENCY DECLARATION AID SUPPLIES FOR THE POPULATION How it is detonated? DISASTER DECLARATION FONDEN resources Disaster Time Line Programmed actions Urgent actions New Reconstruction Fund for local entities

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. Preventive Financial Instruments Reactive Preventive With more resources invested in prevention, we are achieving to avoid large disbursements of resources to attend the damages caused by natural disasters. Global Strategy

 Merge between FIPREDEN and FOPREDEN;  Projects based in the risk knowledge;  The possibility to present projects the entire year round;  The projects has to contain a favorable opinion of a technical federal entity;  The Local Risk Atlas as a starting point to present new preventive projects;  The resources approval and exercise thru the Preventive Trust;  The participation of the academic sector thru the investigation account within the Preventive Trust;  The resources approval can be made within the same year that the project is presented;  Variability in the percentages of participation, seeking to benefit the risk analysis and the promotion of a preventive and self protection culture. New FOPREDEN

 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. Preventive actions financed by the new FOPREDEN

In attention to the government’s 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. Background Presence of disasters caused by nature The Natural Disasters’ Fund (FONDEN) was created in 1996 Federal Government Natural Disasters Fund “FONDEN”

I.The FONDEN program.- which has a budget line within the Federal Budget of every year; II.The FONDEN Trust.- which is the financial tool thru which the reconstruction is paid and also to finance the acquisition of risk transfer instruments; III.The Immediate Fund.- which is financed by the FONDEN program and/or the FONDEN trust indistinctly; Aid supplies acquisition Reconstruction of damaged infrastructure and housing Contracting of risk transfer instruments The FONDEN is integrated by the following instruments: According to the article 37 of the Federal Budget Law, the FONDEN program budget of each year plus the FONDEN trust reserves cannot be less than 0.4% of the federal budget ($800mdd aprox). supports to develop a risk transfer strategy for local assets

In the event of damages in the infrastructure of the States and Municipalities, the supports provided by FONDEN will be until 50% of the total cost for the reconstruction. The federal entities will be in charged of the execution of this 50% and the local governments will be responsible for the reconstruction of the other 50% with their own resources or thru a credit line from the new Reconstruction Fund for local entities. To attend the federal infrastructure, all the resources will be provided thru FONDEN, with the condition that the federal entities justified that they don’t count with resources in their budgets to pay by themselves the damages. The trustee of the Federal FONDEN Trust is in charge of delivering the approved resources to the contractor businesses of the Federal entities according to the reconstruction advances. The FONDEN procedure

FONDEN PROCEDURE 1/2 Beginning I. Geological III. Others II. Hidrometeorological Issues an opinion regarding the occurrence of the natural phenomena Natural disaster Ask for the confirmation of the occurrence of the natural phenomena Technical entity Opinion ? Negative Positive End Notifies the State that his request is positive Local State Natural Phenomena

Request the issue of the natural disaster declaration Installation of the evaluation committee Each sector evaluates and determine the amounts required for the reconstruction and Delivery of the evaluation results Request for the rapid response resources to realize urgent actions Present to the Committee their preliminary lists of works and actions to be done Ask for resources to attend the evaluation Issue and publish on the national official newspaper the natural disaster declaration 2/1 Local State Federal Agencies Ask for advances to start the reconstruction Local State SHCP Local FONDEN Trust Committee/ SEGOB Authorizes the rapid response resources to realize the urgent actions 2/3 Installation APIN FONDEN PROCEDURE Approve the list of urgent actions to be realized by each sector

Federal FONDEN Trust National Committee Approve the advances Authorizes the total resources for the reconstruction of the federal infrastructure and as much as 50% of the local infrastructure for the federal entities to attend. Meanwhile the States will take care of the other 50% Issue a positive opinion for the documents of each sector so the resources can be approved 3/2 Federal Entities SEGOB Review and present the final documents to access the total resources for the reconstruction Fin SHCP Start the urgent works and actions for the reconstruction with the advances authorized Federal Entities FONDEN PROCEDURE

The Ministry of Interior is the coordinator of the process, since the occurrence of the 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 it’s federal or local infrastructure. The execution of the reconstruction works corresponds to the Federal Entities and the Local States. The reconstruction of the federal infrastructure suffer no changes; the federal entities will be in charged of the reconstruction and FONDEN will pay 100% of the cost directly thru the Federal FONDEN trust. For the local infrastructure, the States will have to go thru all the FONDEN process and then once the evaluation is done they will have to sign an agreement with the federal government in which they will let the federal entities reconstruct 50% of the damaged infrastructure with FONDEN resources and they will be in charge of the other 50% with their own resources. Execution

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

Balance: Prevention Reconstruction Challenges and priorities The preventive action and the disaster risk management in Mexico as a central key element. FONDEN US$4,731 MDD FONDEN US$4,731 MDD FOPREDEN US$114 MDD How much have we invested in the prevention field? Between 2005 and 2010 there is a wide gap between the total disbursement in reconstruction against the investment in prevention The prevention, understood as an investment, will represent in the near future substantial savings, which could be used in the development and economic growth of the country

US $788 million dlls average US $25 million dlls average FOPREDEN budget per year: Balance: Not investing in prevention lead to excessive material and social costs which also compromise the sustainable development of our country TODAY Prevention Reconstruction DISASTER Average FONDEN expenditure per year: Challenges and priorities

FOPREDEN FONDEN $ minimum Average loses per year: 20% of the average losses Investment in prevention per year: 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 of the country TOMORROW... diminish... main financial instrument to invest in prevention DESASTRE PreventionPrevention Reconstruction Challenges and priorities

FOPREDEN AND IMPROVEMENTS $1.42 billions Reconstruction $ 3.05 Billions RECONSTRUCTIONFOPREDEN AND IMPROVEMENTS VS Improvements and additions: thru FONDEN’s budget, it’s possible to include mitigation actions to avoid future damages thru specific reconstruction norms that will reduce the vulnerability before future disasters 1. Improvements and additions Preventive aspects of FONDEN FOPREDEN and improvements USD$1.42 billions Reconstruction USD$3.05 billions

Attending to an eminently preventive spirit, we seek that in a medium time limit all the States count with their own natural disaster fund, in order to decentralize this function from the federal government and avoid that all natural disasters that occur in the country continue being attended with federal resources. Preventive aspects of FONDEN 2. Local states funds

This section of FONDEN was created to attend the necessities that the federal entities that belongs to the National Civil Protection System have, to count with the appropriate and sufficient equipment to help the states and municipalities to attend all kinds of different situations caused by disasters. 3. Specialized equipment to prevent and attend natural disasters. Preventive aspects of FONDEN

“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 There’s 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. In May of 2006, the Mexican Government subscribed the first catastrophic bond issuance in Latin America (“Cat Mex”). A new scheme to complement FONDEN through the financial markets. 4. Risk transfer instruments Preventive aspects of FONDEN

Cat-Mex - Features Cat Mex was a combination of a parametric reinsurance contract and a cat-bond (290 and 160 md, respectively); it covered for three years specific zones against earthquake risk. Zone A: Northwest Cocos Zone B: Central Cocos Zone C: Outer Mexico City

Multi Cat Mexico 2009-Earthquake MultiCat covers 3 zones against earthquake; the coverage amounts to 140 md. Multi Cat Mexico is a catastrophic bond that provides protection for earthquake and hurricane risks. The period covered is three years for

Multi Cat Mexico 2009-Hurricane MultiCat provides financial protection to 150 md against hurricanes in two of the highest-risk zones in the Pacific Coast and the riskiest zone in the Atlantic Coast.

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. The coverage contracted is unique in it type by an emerging country to transfer natural disasters risks. With the same database and risk analysis done, Mexico began the develop of a risk transfer scheme for events in a bottom layer that covered by Multi Cat. Stop Loss Coverage - Design