Latin America has seen growing success in mitigating risk from natural disasters as it expands its public-private partnership with re/insurance schemes to preempt heavy post-event costs, Brink – a Marsh Mclennen company’s publication – recently highlighted.
With populations highly concentrated in cities throughout Latin America, much of the GDP and economic development stems from urbanised areas – this means the region is particularly vulnerable to natural disasters, where with low levels of insurance penetration, catastrophes could deal a massive blow to personal livelihoods and local economies.
But the region, and particularly Mexico, has come under the spotlight for exemplary progress in closing the protection gap through clever risk transfer solutions, such as the Mexican re/insurance programme, The Fund for Natural Disasters, (FONDEN).
Brink said The World Bank called FONDEN the; “vanguard of initiatives aimed at the development of an integrated disaster risk management framework, including the effective use of risk financing and insurance mechanisms to manage the fiscal risk derived from disasters.”
FONDEN is a financial vehicle used by the government to provide pre-event funding from tax revenues for disaster response and reconstruction.
Funds are allocated via a Mexican state-owned development bank according to legal requirements and dedicated to specific reconstruction programmes.
FONDEN provided the necessary legal structure and safeguards through which the Mexican government could connect with international capital and reinsurance markets to create risk transfer schemes.
The programme incentivises risk prevention purchase by covering up to 50% of provincial assets if municipalities implement risk transfer strategies – and its seen remarkable success — renewing in 2012 with over 40 international reinsurers, and Brink said it “demonstrated considerable buying power by convincing the market to accept its own damage assessment and adjustment procedures.”
In 2006, FONDEN was used to purchase Mexico’s first cat bond, and in 2015 secured a $50 million pay out for cyclone Patricia losses.
The Mexican National Civil Protection System (SINAPROC), is another programme highlighted by Brink as leading the way in the creation of a multi-level system to integrate government, private, academic and scientific stakeholders in a framework of emergency response coordination.
When Mexico’s second most severe tropical cyclone, Patricia, hit, SINAPROC’s early warning system meant the affected population was protected with fast evacuation.
Thanks to these initiatives, the Mexican government has witnessed considerable success in reducing the protection gap – that otherwise threatens to diminish development progress in emerging markets in the face of a natural disaster.
And while FONDEN has been highlighted as representing the vanguard of public-private partnerships in Latin America, it’s the tip of the iceberg in the shift the continent is seeing from post to pre-event financing and prevention.
The venture incubator, Blue Marble, a microinsurance scheme is set to launch a further ten schemes throughout the region in the next ten years; “Blue Marble is currently working to close the protection gap in the risk that climate change poses to smallholder farmers in Latin America with the intention to launch pilots in 2017.
“Blue Marble understands the value of public sector–private sector partnerships in achieving its mission; it is coordinating its initiatives to bolster agricultural production and the management of associated risks with local government officials, including Ministers of Agriculture,” said Brink.
And further projects are underway as Mexico looks to expand its catastrophe prevention portfolio with the issuance of another government sponsored 3 year cat bond for hurricane and earthquake risks.
The Pacific Alliance, a Latin American trade bloc, is receiving World Bank assistance in negotiating the issuance of a joint catastrophe bond.
Artemis has reported before that the Pacific Alliance members, Peru, Chile, Colombia, and Mexico, were having discussions involving reinsurance firm Swiss Re about the potential for a joint catastrophe bond issue.
Although the obstacles to overcome for successful risk transfer solutions implementation remain significant, these projects demonstrate the great strides the region has made and continues to make in closing the protection gap as public-private partnerships increasingly employ re/insurers and capital markets for risk mitigation.