Mexico

Prevalence of natural hazards

Located in North America between the Caribbean Sea to the southeast, the Gulf of Mexico to the east, and the North Pacific Ocean to the west, Mexico is home to distinct landscapes and natural hazards of all types, including geological, hydro-meteorological and climatological.

Mexico’s national territory is subject to high seismic activity due to the interaction of three major tectonic plates: the Cocos plate, the North American plate, and the Pacific plate. As a result, central and southern Mexico is exposed to significant seismic risk. Tsunamis can occur along the Pacific coast and more than half of Mexico’s territory is exposed to the risk of strong earthquakes. The 1985 Mexico City earthquake, which caused at least 6 000 casualties and an estimated USD 4.1 billion in damage is one of the most destructive earthquakes in recent history. Along the volcanic arc in the south as well as within the Baja California Peninsula, several active volcanoes threaten the territory (CalTech, 2009; OECD, 2013).

Types of natural hazards to which Mexico is exposed

Natural hazard category

Types of natural hazards

Geophysical

Earthquakes; volcanic activity

Meteorological

Tropical cyclones; extreme temperatures

Hydrological

Floods; landslides

Climatological

Droughts; wildfires

Source: OECD, 2013.

Major natural disasters in Mexico since 1980

Disaster event/location

Year

Deaths

People injured/affected/displaced

Estimated damage (in USD billion)

Hurricanes Manuel and Ingrid

2013

192

155 000

5.7

Hurricane Emily

2005

7

1 000 000

5

Mexico City earthquake

1985

6 000

2 100 000

4.1

Floods/Tabasco

2007

-

-

2.9

Hurricane Odile

2014

6

-

2.5

Sources: EM-DAT, 2017; CENAPRED, 2007 as cited in OECD, 2013.

Mexico is one of the few economies in the world exposed to tropical cyclones originating in two ocean basins: the North Atlantic, where the cyclonic season starts in June and ends in November; and the North Pacific, where the season starts in May and lasts until November. Nearly a quarter (23%) of Mexico’s territory is exposed to high or very high tropical cyclone risk, 17% to medium risk, and 60% to low risk (OECD, 2013). In 2013, Hurricanes Ingrid and Manuel hit Mexico from the Atlantic and Pacific coasts in the space of 24 hours; heavy rains and landslides caused 192 deaths and affected an estimated 155 000 people. Considered as a single event, the hurricanes were the most expensive disaster recorded in Mexico’s recent history, with an estimated USD 5.7 billion in damages. Hurricane Emily in 2005 was another damaging event, affecting over 1 million people and causing some USD 5 billion in damages.

Floods resulting from heavy rains occur throughout the year, and not just during tropical cyclones. Especially during the rainy season (March to November) the frequency of floods is higher in Mexico’s south, but flooding can also occur in the north. In 2007 devastating floods affected the state of Tabasco, causing USD 2.9 billion in damages.

Along Mexico’s Sierra Madre mountain range, the risk of landslides and avalanches is high. One of the many landslides caused by Hurricane Manuel, for example, almost entirely destroyed la Pintada, a small village in the western Sierra Madre Mountains (Nadim et al., 2006).

Finally, Mexico is exposed to a number of climatological hazards, such as droughts and frosts. In 2015 a drought heavily affected Guerrero, suffering economic damages of around USD 26 million. Hailstorms and frosts frequently occur in central and northern Mexico and have caused significant damage to agriculture in the past. In 2011, Atzalán in Veracruz was heavily affected by frost, suffering economic damages of around USD 2 million (OECD, 2013). Climate change is expected to cause an increase in the incidence and magnitude of climatological and hydrometeorological disasters in Mexico (Monterroso and Conde, 2013; OECD, 2013).

Past fiscal impacts of disasters

Estimates of the annual average losses from disasters in Mexico range from USD 2 billion to almost USD 3 billion (CENAPRED, 2016; EM-DAT, 2017; PreventionWeb, 2017), corresponding to around 0.12% of annual gross domestic product (GDP) between 2000 and 2015. The impact of single large-scale disasters, such as the 1985 earthquake that caused damages equating 2.2% of GDP, can significantly exceed this. Despite their relatively low average impact of disasters, repairing disaster-related damages can create a significant burden for public finances, especially in states with comparatively low per capita income or multi-hazard exposures (OECD, 2013).

The annual amount of government spending on ex post disaster assistance, including reconstruction of public assets and low-income housing, came to USD 1.46 billion between 1999 and 2011; the majority was used to rehabilitate subnational public infrastructure. The central government finances all costs related to nationally owned assets, and 50% of costs related to subnationally owned assets; subnational governments are expected to finance the rest.

Most central government spending on disaster risk management comes from the Fund for Natural Disasters (Fondo de Desastres Naturales, FONDEN). The fund is mandated to finance emergency assistance, post-disaster recovery and reconstruction of public infrastructure, and rehabilitation and reconstruction of low-income housing (World Bank et al., 2012). Under Mexico’s Federal Budget and the Fiscal Responsibility Law (Ley Federal de Presupuesto y Responsabilidad Hacendaria, LFPRH), a minimum of 0.4% of programmable federal spending must be distributed between FONDEN and two related disaster risk management funds, the Fund for Disaster Prevention (Fondo Para la Prevencíon de Desastres Naturales, FOPREDEN) and the Fund to Support the Rural Population Affected by Climate Hazards (Fondo de Apoyo Rural por Contingencias Climatológicas). Between 2005 and 2010, on average FONDEN spent around USD 19 million per year. In exceptional years, when the costs have run beyond this allocation, the Federal Budget Law allows the Ministry of Finance to arrange exceptional budget allocations.

FOPREDEN is FONDEN’s account for ex ante risk prevention spending. FONDEN is mandated to invest through FOPREDEN in hazard identification and assessment, in risk prevention and mitigation measures, and in local community capacity building for disaster risk prevention. The annual budget allocation for FOPREDEN depends on the total funding allocated to FONDEN, and may be topped up by any uncommitted post-disaster relief and recovery funds at the end of the year. In fiscal year 2017 USD 10 million was allocated to FOPREDEN; ex ante expenditures thus account for only a small share of the government funding for disaster risk management in Mexico. However, there are other risk prevention programmes financed by other ministries. Although a systematic picture is difficult to obtain, a few examples can be given here: The Ministry of Social Development has a budget for risk prevention of an estimated USD 10 million a year; the hydraulic infrastructure projects of the National Water Commission (Comisión Nacional del Agua, CONAGUA) are worth over USD 1 billion a year; and the 2030 Water Agenda has projected spending another USD 6 billion in infrastructures for risk reduction over the next 20 years (OECD, 2013).

Ex ante versus ex post disaster risk management expenditures through FONDEN/FOPREDEN in Mexico
Ex ante versus ex post disaster risk management expenditures through FONDEN/FOPREDEN in Mexico

Source: World Bank et al., 2012.

Subnational governments are responsible for a considerable share of ex post government assistance. The Law regarding the Financial Discipline of Federal and Municipal Entities (Ley de Disciplina Financiera de las Entidades Federativas y los Municipios) gives subnational governments primary responsibility for post-disaster support to affected populations and for recovery of damaged subnational public infrastructure. At subnational level, governments spent an estimated USD 521 million annually for ex post disaster assistance, representing about 36% of total government ex post assistance.

Managing disaster-related contingent liabilities

Identification of disaster-related contingent liabilities

Explicit contingent liabilities

Explicit contingent liabilities arise from payment obligations that are based on laws, or clear policy commitments that could fall due in the event of disaster. The table below provides an overview of the explicit government obligations for providing disaster assistance in Mexico.

Explicit central government obligations for post-disaster financial assistance in Mexico

Commitment to finance…

Yes

No

… post-disaster response and recovery

… a share of the costs incurred by subnational governments for post-disaster response and recovery

… reconstruction and maintenance of central government-owned public assets

… rehabilitation and reconstruction of private assets

… other expenses incurred by subnational governments (e.g. payments to businesses or individuals)

…government guarantees for disaster losses incurred by public corporations and public-private partnerships

X

Source: OECD Survey.

Through FONDEN, the central government of Mexico provides disaster assistance for the following purpose:

  • Rehabilitation and reconstruction of damaged federal public infrastructure, (covering 100% of costs).

  • Rehabilitation and reconstruction of damaged subnational public infrastructure (covering up to 50% of costs).

  • Support to strengthen resilience of damaged infrastructure against future disasters– i.e. to improve rather than merely replace infrastructure (an estimated 25% of approved funding requests are for this purpose [World Bank et al., 2012]).financing the rehabilitation and reconstruction of low-income housing.

Post-disaster assistance through FONDEN is available only if an emergency has been officially declared1, if the disaster has been scientifically confirmed, and if a damage assessment has been carried out (this is usually done jointly by the central and subnational governments).

To discourage overreliance on disaster assistance provided through FONDEN, rules have been established that limit reimbursement for uninsured public infrastructure that is damaged more than once. If support for reconstruction of a federal asset is requested a second time, FONDEN covers 50% instead of 100% of costs. For subnationally owned infrastructure, FONDEN covers 25% rather than 50%. FONDEN will not provide resources for a third reconstruction request. For insured public infrastructure, however, eligibility for FONDEN funding remains the same even after repeated reconstruction requests.

Under the Law regarding the Financial Discipline of Federal and Municipal Entities and the General Law of Civil Protection (Ley General de Protección Civil) subnational governments have the primary responsibility to provide post-disaster support for damage to subnationally owned public infrastructure and for the population affected. The General and Operational Rules for FONDEN allow subnational governments to request funding from the central government to support affected populations when subnational financing capacities are exceeded and an emergency has been officially declared. However, the laws do not specify a maximum amount for post-disaster assistance that can or should be provided to subnational governments, allowing room for discretion. As specified in the Disaster Fund Specific Operations Guidelines (Lineamientos del Fondo para la Atención de Emergencias), the need for assistance is reassessed on a ten-day basis. Assistance ends if the General Directorate of Civil Protection, assisted by the National Centre of Communications (Centro Nacional de Comunicaciones, CENACOM) and subnational authorities, determine that the emergency situation is over, or if subnational entities have recovered their operative and financial capacities.

Low-income households whose homes have been damaged or destroyed by a disaster receive compensation through FONDEN of up to USD 6 700, to be used for reconstruction. For damaged housing items that cannot be covered by insurance, the Housing Institute may offer a small allocation of USD 1 100 to USD 1 400 per household. The compensation amount is based on the extent of damage and is independent of any kind of ex ante preventive provisions made by the household. The compensation for low-income households is handled by the Ministry of Territorial Development. Compensation is also available for household contents damaged during a disaster. Complementing the housing compensation, the Ministry of Social Development provides temporary employment allowances for households whose income has been affected by a disaster.

Everything related to the restoration of public services, such as water and waste management, can be immediately financed through the Immediate Partial Support Mechanism (Apoyos Parciales Inmediatos, APIN). Funding for immediate relief items, such as food, medical supplies, bedding, and cleaning supplies can be funded via the Emergency Fund (Fondo para la Atención de Emergencias, previously Fondo Revolvente). Both funds are part of FONDEN. The Emergency Fund makes up around 10% of FONDEN’s resources (World Bank et al., 2012). It can be accessed if an emergency declaration is issued by the Ministry of Interior (Secretaría de Gobernación, SEGOB). However if only one subnational government (i.e. state) is affected and a national disaster declaration is not warranted, the state may still be eligible for central government funding under the Emergency Fund, provided a subnational disaster has been declared. In addition, resources for post-disaster recovery in the months after the disaster are available via the FONDEN Trust.

The Fund to Support the Rural Population affected by Climate Hazards (Fondo de Apoyo Rural por Contingencias Climatológicas) was established to provide support to low-income farmers who do not have agricultural insurance and who are affected by climate-related hazards. The maximum federal contribution is set at 70% of the insurance premium for farmers for insurance offered through the Mexican Government Insurance Company Agroasemex S.A. (World Bank, 2009).

Implicit contingent liabilities

Implicit contingent liabilities are expenditures that might arise due to moral obligations not linked to any prior commitments, or due to public expectations or political pressure on the government. In Mexico, the central government has made additional funding for ex post disaster assistance available in cases of exceptional need. The year 2010 saw the creation of the Reconstruction Fund for Federal Entities (Fondo de Reconstrución de Entidades federativas), through which zero coupon loans with a 20-year maturity were issued by the Ministry of Finance via Mexico’s national public works bank BANOBRAS. These loans were made to affected subnational governments that had requested support through FONDEN but were unable to meet the minimum self-funding requirement for subnationally owned public assets (World Bank et al., 2012).

Contractual obligations that may arise from the government’s ownership of state-owned enterprises can create a secondary set of disaster-related contingent liabilities – although Mexico does not acknowledge them as explicit liabilities. The recent steps towards privatising some major state-owned enterprises in Mexico, such as the petroleum company PEMEX or the Federal Electricity Commission (Comisión Federal de Electricidad, CFE) have reduced the potential liability for the government stemming from damages incurred by disasters. PEMEX has obtained private insurance costing USD 426 million the two-year policy protects against a maximum USD 1.75 billion in damages.

Estimation of insurance payouts

For central-government-owned infrastructure, insurance coverage is relatively clear. FONDEN has identified and assessed the vulnerability of such infrastructure and these assets are all covered against disaster damages by FONDEN-backed insurance. Federal roads, however, have not been insured and remain an important government liability in the event of a disaster (OECD, 2013).

The use of insurance by subnational governments, i.e. states, to cover damages to their public infrastructure, has been relatively limited. States own approximately 60% of all public infrastructure assets. By 2011, only 5 of 31 states had purchased an insurance policy. FONDEN supports states in identifying state-owned assets at risk, in carrying out vulnerability assessments, and in deciding upon an appropriate risk transfer strategy. However, only three states have carried out these three steps under FONDEN guidance, and another seven are currently working with FONDEN in this regard. One of the barriers states face in obtaining public asset insurance may be to the difficulty of diversifying risk exposure.

For farmers, the Ministry of Agriculture administers a public insurance programme that offers indemnity insurance against floods, hail and earthquakes. As a result, 60% of farmers are covered against disaster damages to their crops. Uninsured farmers have been covered by state insurance policies.

For businesses, there is no compulsory insurance against the impacts of disasters.

Insurance coverage for public assets at subnational (state) level in Mexico, 2011

State

Chiapas

Guerrero

Hidalgo

Jalisco

Veracruz

Duration

1 year

1 year

1 year

2 years

1 year

Sectors

Housing, hydraulic, roads, urban

Housing, roads

Housing, hydraulic, roads, urban

Housing, hydraulic, roads, urban

Education, housing, hydraulic, roads

Insurer

Interacciones

Banorte – Generali

Inbursa

Inbursa

Interacciones

Covered risks

Geological and hydrometeo- rological

Any direct physical loss or damage caused by natural disasters recognised by the federal government (geological and meteorological events)

Geological, hydrometeorological; coverage is not restricted to the list

Any risk of physical loss or damage caused by a natural disaster declared by the federal government as an emergency or disaster for the state of Jalisco

Any risk of physical loss or damage caused by a natural disaster and recognised as such by the federal government

Source: OECD, 2013.

Private insurance coverage protecting households against the impacts of disasters remains relatively low in Mexico. The number of private households that are insured against disasters as part of their mortgage is estimated at 6.5 million. The Federal Institute for Workers’ Housing (Instituto del Fondo Nacional de la Vivienda para los Trabajadores, INFONAVIT) annually hires an insurance policy on behalf of more than 5 million loan holders. The insurance covers the reconstruction of housing damaged by earthquakes and hydro-meteorological hazards but does not cover household goods (for which the Housing Institute may provide up to USD 1 400 in compensation per household). Mexico is also currently running trials on linking disaster insurance to property taxes.

Quantification of disaster-related contingent liabilities

The table below provides an overview of disaster-related contingent liabilities that are quantified in Mexico.

Types of information from previous events available to calculate disaster-related contingent liabilities in Mexico

Type of disaster-related expenditure

What gets recorded

Relief spending

Federal expenditure through FONDEN is recorded, but only for immediate attention to emergency needs, such as the provision of water, staple food, medicines, blankets, etc.

Spending for the reconstruction of damaged public infrastructure and assets

Federal expenditure allocated via FONDEN in response natural disasters, such as hurricanes, earthquakes or heavy rain

Spending for the reconstruction of damaged private assets

Federal expenditure allocated via FONDEN to reconstruct low-income housing damaged by natural disasters, such as: hurricanes, earthquakes or heavy rain

Spending on increased social transfers due to a post-disaster economic slowdown

Federal expenditure allocated via the temporary employment programme administered by the Ministry of Social Development (Secretaría de Desarrollo Social, SEDESOL)

Expenditures due to guarantees issued to public or private entities suffering disaster losses

Not included

Post-disaster payments to subnational governments

Assistance transferred to subnational governments and earmarked for reconstruction purposes is recorded

Reduced tax collections

Not included

Disrupted operations of public corporations

Expenditure dispersed via the Continuity of Operations Programs for the Health and Education sectors (Programa Hospital Seguro y Escuela Segura), via FOPREDEN

Disrupted operations of private corporations

Not included

Deterioration in the terms at which the government can in the short term refinance public debt or raise additional debt

Not included

Source: OECD survey response.

To estimate the size of disaster-related contingent liabilities, Mexico uses historical data on expenditure disbursed via FONDEN and the agricultural disaster funds, as well as results from the National Risk Atlas (Atlas de Riesgos) and available information on property values in hazard areas.

A public asset inventory database, which was created in 2013 and is biannually updated, assists in the estimation of disaster-related contingent liabilities with information on public assets (roads and bridges, water distribution, hospitals, schools and others) and their insurance coverage.

For high-impact perils, such as earthquakes, hurricanes and heavy rain, the Technical Committee of FONDEN (Comité Técnico de FONDEN) uses catastrophe modelling based on the Loss Estimation for Federal Risk System (R-FONDEN), a probabilistic catastrophe risk assessment tool, to estimate the frequency and intensity of disasters and to forecast potential costs.

For subnational infrastructure, subnational governments are responsible for analysing risk exposure and quantifying the expected necessary expenditure for reconstruction and post-disaster support to the affected population.

Disclosure of information on disaster-related contingent liabilities

Once disaster-related contingent liabilities are recognised and quantified, disclosing them within existing budgets enables rational and informed decision making. According to Article 16 of the Federal Budget and Fiscal Responsibility Law, the “most relevant risks to public finances in the short run” have to be published in the annual General Economic Policy Guidelines2, which annually inform development of the central budget. This list of risks includes a reference to natural disasters. In addition, FONDEN allocations for post-disaster reconstruction, broken down by disaster and sector are publicly disclosed on line.3

Estimating the fiscal impacts of disaster-related contingent liabilities and integrating them into overall fiscal forecasting

The Ministry of Finance assesses and manages fiscal risks. Each type of fiscal risk is treated by a different unit in the ministry. The Insurance, Pensions and Social Security unit for example is in charge of identifying, evaluating and managing the fiscal risks arising from natural disasters.

In Mexico, the federal budgeting process involves assessment and development of a management strategy for the most relevant fiscal risks, namely short- and long-term macroeconomic risks and various contingent liabilities, which include natural disasters. Owing to their potential adverse impact on public finances, natural disasters are one of the long-term risks regularly assessed and considered in both medium- and long-term fiscal policy. The results are taken into account in the annual budget allocations to FONDEN and the information presented in the General Economic Policy Guidelines (Estados Unidos Mexicanos, 2017).

Fiscal forecasts evaluate the potential impacts of fiscal risks on revenues and expenditures. Impacts of short-run macroeconomic risks on revenues and expenditures are estimated using a partial equilibrium approach and simulating likely changes to the main economic and financial variables that determine the budget. (The latter include the peso/dollar exchange rate, the oil price and the interest rate.) There is an implicit assumption that the risks are independent, symmetrical and linear.

More complex risks – the potential damages from concomitant disasters, the knock-on impacts a disaster may trigger or and the occurrence of a major disaster during times of fiscal constraints or economic downturns – are not currently considered in Mexico’s fiscal risk analysis. However, there are available policy tools for managing such risks. The Budget Revenues Stabilisation Fund (Fondo de Estabilización de los Ingresos Presupuestarios, FEIP) and the Federal States Revenues Stabilisation Fund (Fondo de Estabilización de los Ingresos de las Entidades Federativas, FEIEF) save up budgetary resources for use when government revenues fall below predicted levels, e.g. due to economic downturns.

Implementation arrangements for providing post-disaster financial assistance

The Ministry of Interior is responsible for natural disaster declarations, which are issued if an adverse event causes damage exceeding local operational and financial response capacity. On average, 30 such declarations are issued each year (World Bank et al., 2012). The request to SEGOB can be made by subnational governments (i.e. the governor of the affected state) or relevant national agencies within ministries. These declarations are then verified by the technical agency in charge of the disaster type. Following confirmation of the disaster declaration, SEGOB takes the lead in the post-disaster assistance process.

In a second step, and within one day of the disaster declaration, a Damage Assessment Committee is established consisting of central and subnational government representatives from the affected regions and the responsible federal agencies. Within ten days the Committee has to identify and quantify damage to public infrastructure.

Subnational governments, i.e. states, have 30 calendar days after the declaration is published to submit their request for central government support through FONDEN. Such requests must show that the state’s funding needs exceed its own financial capacities.

The General Directorate of FONDEN evaluates the funding requests and must verify the following before submitting them to the Ministry of Finance (World Bank et al., 2012):

  • There is no duplication of effort among the federal and state entities.

  • The requested resources are only intended to address damage caused by the disaster (not pre-existing damage).

  • No asset reported as damaged has previously received any reconstruction financing from FONDEN. If an asset has received FONDEN support but did not secure catastrophe insurance following the disaster, then it will be eligible for lower levels of support, in accordance with the fund’s policies.

The Ministry of Finance has five days to authorise the funding. The fiduciary of the FONDEN Trust is the state-owned development bank BANOBRAS, which operates according to the mandate of the Ministry of Finance. It disburses approved expenditures to the businesses contracted by the central or subnational government to carry out reconstruction – that is, expenditures are not disbursed to the federal agencies or subnational governments responsible for the reconstruction. This is done to expedite the process and ensure efficiency (OECD, 2013).

For subnationally owned infrastructure, governments seeking reimbursement of up to 50% from the central government must submit a list of reconstruction activities the relevant federal agency is then in charge of these. FONDEN resources are provided on the understanding that the remainder of the reconstruction activities will be conducted by state and municipal agencies (World Bank et al., 2012).

As mentioned earlier, for more immediate access to financing, the Immediate Partial Support Mechanism provides financing to address urgent disaster needs, such as lifeline infrastructure, debris removal or equipment rental. This part of FONDEN financing is approved by the Ministry of Finance within 24 hours of the receipt of a request from a federal or state entity and should be used within 30 days.

Implementation arrangements for providing post-disaster financial assistance in Mexico
Implementation arrangements for providing post-disaster financial assistance in Mexico

Source: World Bank et al., 2012.

Mitigating disaster-related contingent liabilities and financing residual risks

To mitigate previously identified, quantified and disclosed disaster-related fiscal risks, governments need to control and ideally reduce the size of contingent liabilities, and decide on how to provision for the residual risk.

The central government of Mexico administers a comprehensive, layered approach to disaster risk financing, including provisions for sharing reconstruction costs across levels of government and early recovery funding made available during national emergencies. With FONDEN, the federal government has established a clear cost-sharing agreement with the subnational governments that limits the federal government’s obligation to provide post-disaster support, while assisting states in meeting their obligations as the primarily responsible authorities. In addition, the Disaster Fund Specific Operational Guidelines limit repeat eligibility for post-disaster support to insured public assets, encouraging subnational governments to invest in disaster risk transfer. The scope of post-disaster support is clearly limited to low-income population and uninsured low-income farmers, and avoids claims from businesses and those able to afford insurance. Nonetheless, insurance take-up by households and businesses remains low (OECD, 2013).

To absorb the risk of insufficient funds in FONDEN, sector-specific risk transfer mechanisms have been designed. Insurance exists for centrally and subnationally owned public infrastructure. As explained above, while FONDEN covers up to 50% of the reconstruction cost the first time a subnationally owned asset is damaged, it will cover only 25% the second time if no insurance has been purchased, and will offer no funding for subsequent requests. States should consequently insure at least 50% of the value of their infrastructure, as specified in the Disaster Fund Specific Operations Guidelines. For both centrally and subnationally owned public infrastructure, the take-up of insurance varies considerably across Mexico (OECD, 2013).

FONDEN’s Risk Transfer Mechanisms
FONDEN’s Risk Transfer Mechanisms

Source: Comisión Nacional de Seguros y Fianzas, 2017.

As part of FONDEN’s risk transfer mechanisms, indemnity-based excess-of-loss catastrophe insurance has been part of the Mexican risk transfer mix since 2011 (World Bank et al., 2012). The excess-of-loss coverage for indemnity is triggered when requests to FONDEN exceed USD 56 million due to a single natural disaster. The premium paid by Mexico for the coverage in 2017-18 reached USD 50 million and represents 18% of the maximum limit of liability coverage. The high cost can be explained by the significant disaster losses registered due to Hurricanes Manuel and Ingrid in 2013 (OECD, 2013), although it has been decreasing in the latest renewals.

In 2006 Mexico signed up for a catastrophe bond (CatMex), the first of its kind in Latin America (CatMex) for coverage against earthquakes; this was then converted to a multi-risk instrument (MultiCat Mexico) that also covered tropical storms. The bond’s 2012-15 renewal provided coverage of up to USD 315 million, with USD 140 million for earthquakes, USD 100 million for Pacific coast hurricanes, and USD 75 million for Atlantic hurricanes. In 2015 Hurricane Patricia triggered the MultiCat, resulting in a USD 50 million indemnity to FONDEN. The latest renewal in 2018 includes a Cat-Bond worth USD 260 million, providing coverage against losses from earthquakes. The September 2017 earthquakes triggered the catastrophe bond, resulting in a USD 150 million indemnity (World Bank, 2017).

In complement to the disaster recovery assistance arrangements and risk transfer instruments described above, Mexico has also recognised the need to reduce disaster-related contingent liabilities for the government by focusing on risk prevention and mitigation management through FOPREDEN and other risk prevention funds administered by different ministries, as earlier described.

References

CalTech (2009), “The unusual case of the Mexican subduction zone”, www.tectonics.caltech.edu/outreach/highlights/mase/.

CENAPRED (2016), “Disaster damage data set submitted to the OECD”, National Center for Prevention of Disasters.

CENAPRED (2007), “Inundaciones” [Floods], Serie Fascículos, Secretary of the Interior, Mexico.

Comisión Nacional de Seguros y Fianzas (2017), Presentation at the OECD High Level Risk Forum, Paris, December 5–7, http://www.oecd.org/gov/risk/7th-oecd-high-level-risk-forum.htm.

EM-DAT (2017), The Emergency Events Database, Université Catholique de Louvain (UCL) – CRED, D. Guha-Sapir, Brussels, Belgium, www.emdat.be (accessed 14 September 2017).

Estados Unidos Mexicanos (2017), “Criterios generales de política económica para la iniciativa de ley de ingresos y el proyecto de presupuesto de egresos de la federación correspondientes al ejercicio fiscal 2017” [General economic policy guidelines for the income law initiative and the federal expenditure budget project for the fiscal year 2017], http://finanzaspublicas.hacienda.gob.mx/work/models/Finanzas_Publicas/docs/paquete_economico/cgpe/cgpe_2017.pdf.

Monterroso, A. and C. Conde (2013), “Exposure to climate and climate change in Mexico”, Geomatics, Natural Hazards and Risk, Vol. 6, No. 4, pp. 272–88.

Nadim, F. et al. (2006), “Global landslide and avalanche hotspots”, Landslides, Vol. 3, pp. 159–73, https://doi.org/10.1007/s10346-006-0036-1.

OECD (2013), OECD Reviews of Risk Management Policies – Mexico 2013: Review of the Mexican National Civil Protection System, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264192294-en.

OECD (2009), “Managing the oil economy: Can Mexico do it better?”, in OECD Economic Surveys: Mexico 2009, OECD Publishing, Paris, pp. 49–62, http://dx.doi.org/10.1787/eco_surveys-mex-2009-4-en.

PreventionWeb (2017), “Mexico – Disaster & risk profile”, http://www.preventionweb.net/countries/mex/data/.

World Bank et al. (2012), FONDEN – Mexico’s Natural Disaster Fund: A Review, www.proteccioncivil.gob.mx/work/models/ProteccionCivil/Almacen/libro_fonden.pdf.

World Bank (2009), Climate Change Aspects in Agriculture - Mexico Country Note, https://siteresources.worldbank.org/INTLAC/Resources/257803-1235077152356/Country_Note_Mexico.pdf.

Notes

← 1. Mexico’s General Law of Civil Protection Chapter VI, Articles 29–37) specifies the requirements for an emergency declaration. Different technical agencies are involved in examining the declaration: CONAGUA for hydro-meteorological hazards, CONAFOR for forest fires and CENAPRED for geological and other hazards.

← 2. Criterios Generales de Política Económica para la Iniciativa de Ley de Ingresos y el Proyecto de Presupuesto de Egresos de la Federación Correspondientes al Ejercicio Fiscal 2017 [General Economic Policy Guidelines for the Income Law Initiative and the Federal Expenditure Budget Project for the Fiscal Year 2017], http://finanzaspublicas.hacienda.gob.mx/work/models/Finanzas_Publicas/docs/paquete_economico/cgpe/cgpe_2017.pdf.

← 3. Recursos destinados a desastres por Estado [Disaster resources by State], www.gobernacion.gob.mx/es/SEGOB/Recursos_destinados_a_desastres_por_Estado.

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