An efficient strategy to prevent and manage disaster risks in Mexico
November 20, 2012
- Mexico is one of the world’s most exposed countries to natural hazards.
- A recently launched US$315 million catastrophe bond provides insurance against earthquakes and hurricanes.
- The World Bank’s Treasury department served as an advisor to the Mexican Government and as an arranger for this transaction.
The table trembles, you feel dizzy and the lamps start shaking: another earthquake in Mexico. They happen regularly with varying strength. Schools, offices and households have been trained to follow certain instructions. “I don’t run, I don’t push, I don’t scream,” every Mexican kid knows.
With more than 90 earthquakes a year with a magnitude of 4.0 or more on the Richter scale, Mexico is one of the world's most exposed countries to natural hazards.
The country learned a very hard lesson when a major earthquake hit in 1985, leaving thousands of people dead and losses estimated at US$11.4 billion.
The destruction left by the earthquake forced the government at the time to use its resources for reconstruction efforts, instead of, for example, expanding the country’s infrastructure.
With such vulnerability to disasters, Mexico has been forced to prepare itself for catastrophes in order to protect citizens and the economy. And that is why Mexico and the World Bank have a long history of cooperation on risk financing and management, as well as climate resilience, going beyond traditional lending services.
Throughout the years the Bank has provided an integrated package of services which include technical advisory services, relevant reports on the matter, and bringing national and international key players together, putting the issue at the center of its work in Mexico.
When disaster hits, we all know that the poor are its biggest victims. Because of this, any effort to generate greater resilience to disasters must be part of the development agenda.
Prevent disasters for a better development
“When disaster hits, we all know that the poor are its biggest victims. Because of this, any effort to generate greater resilience to disasters must be part of the development agenda”, says Gloria Grandolini, World Bank Director for Mexico and Colombia.
To be able to respond rapidly to disasters, Mexico recently launched a new US$315 million catastrophe bond, called MultiCat Mexico 2012 – a flexible financial tool that provides quick insurance against earthquakes and hurricanes.
MultiCat Mexico 2012 was the third catastrophe bond that Mexico issued, and the second one under the World Bank MultiCat Program. Thanks to Mexico’s solid reputation in the catastrophe bond market and a growing investor base, this new bond achieved very competitive terms.
“The MultiCat Mexico 2012 placement went extremely well” said Doris Herrera-Pol, Director of the World Bank’s Treasury Capital Markets Department. “We are very pleased that our partnership with the Government of Mexico has contributed to its success in efficiently transferring to the market a pool of catastrophic risks.”
“The way it works is that the trigger for the insurance is parametrically determined. If an earthquake is greater than a certain magnitude, or the wind speed is above a pre-determined benchmark, then the amount of the bond is paid,” says Luis de la Plaza, World Bank Lead Financial Officer.
An effective emergency response
Once a disaster hits, and Mexico has the money to respond, the next step is to use it effectively. The country has been focusing on building and improving a transparent and effective system to allocate resources for reconstruction and emergency response.
The government created FONDEN, its natural disasters fund. Moreover, the World Bank has been working with Mexico to provide advisory services on disaster risk financing and insurance.
According to Oscar Ishizawa, Disaster Risk Management Specialist, Mexico has made progress on prevention and risk reduction, which can include safe building codes, or works on roads to improve resiliency when confronted with a potential catastrophe, but there is still work ahead.