1. Presentation prepared to: The International Catastrophic Risks Forum 4th Edition “Catastrophe Risk Management Strategies for Governments of Developing Countries” October 1st-2nd, 2007, Bucharest, Romania Presented by Víctor Cárdenas

2. Page 2 Agenda 1.The high incidence of infrequent cat-events 2.Approaching to new markets: governments in developing economies 3.Some successfully stories 4.Potential new solutions: creating new markets

3. Page 3 Agenda 1.The high incidence of infrequent cat-events 2.Approaching to new markets: governments in developing economies 3.Some successfully stories 4.Potential new solutions: creating new markets

4. Page 4 Natural disaster losses and its frequency in the world have experimented a clear increase Source: EM-DAT It is basically explained by: –The demographic tendency and the mobility of the population settlements to zones of high risk; –The global warming, and; –Human influence in the environment. Frequency of Natural Catastrophes: 1900-2006

5. Page 5 Hydrological and geological hazards are the main sources of catastrophes in the world. Source: EM-DAT The main hazards or natural disaster sources are: –Hydrological (wind storm, wage/surge, flood); –Geological (earthquake, slides, volcano), and –Others (extreme temperatures, wild fires, drought, etc). Total losses in the world (Billions of US Dollars of 2007)

6. Page 6 1.The high incidence of infrequent cat-events 2.Approaching to new markets: governments in developing economies 3.Some successfully stories 4.Potential new solutions: creating new markets Agenda

7. Page 7 Typically, governments are the insurance of last resort in developing countries Source: The World Bank and Swiss Re Sigma Financing of Natural Catastrophes Losses Insured Not Insured

8. Page 8 In cases where the insurance sector is not adequately developed, the governments works as a last resort insurer. In contrast, in developed countries there are several financial mechanism to share and transfer the risk, many of them supported by the insurance sector. Usually, developing countries retain a highly share of the losses, financing it with fiscal resources versus developed countries where the financial system is a risk taker. Source: Swiss Re Average Insurance Development by Region (%=Policies issued/GDP)

9. Page 9 Mexico exemplifies a case where the government finances what the insurance sector does not cover. High insurance industry penetration Low insurance industry penetration In 2005 the total losses for hurricanes were for 3.2 USD billions

10. Page 10 Governments in developing economies are the next target market It is fundamental to promote the development of the insurance industry in developing economies. Governments in developing economies are potential new insureds against catastrophes. Three fundamental insurance objects should be considered for governments as potential policy holder: –Losses for emergency expenses –Losses for reconstruction infrastructure –Governments losses for solidarity duties (housing for poor people, among others)

11. Page 11 1.The high incidence of infrequent cat-events 2.Approaching to new markets: governments in developing economies 3.Some successfully stories 4.Potential new solutions: creating new markets Agenda

12. Page 12 There are several initiatives in LatAm promoting the implementation of risk management strategies. Mexico Safety Net through calamity funds Mexico Earthquake Liquidity Hedge for Emergency Relief Caribbean Catastrophe Pool (CCRIF) Some successfully examples:

13. Page 13 The Mexican calamity funds Historic Background –1995: Natural Disaster Fund (FONDEN) Institutional framework for natural disaster risk management Budgetary Planning: Public Policy framework (sustainability) 3 eligible categories for financing –Emergency relief and reconstruction –Public infrastructure –Productive assets for marginal populations (including low income or subsistence farmers) »Target subsistence farmers: defined based on landholdings per state and eligibility inventory from PROCAMPO –2001-2002: Special Contingency Fund for Agriculture (FAPRACC) Spin-off from FONDEN (transferred to the Agricultural Ministry) Insurance was defined as an eligible expense category of gov’t resources for risk management The Agricultural Ministry invested in R&D for the design of the drought safety net program –Based on accumulated rainfall (insured: State Governments) »Coverage for CAT loss: Equivalent to yield loss bigger than 70% –Executing capacity on the ground (technical expertise) –Institutional flexibility for an appropriate financial engineering effort

14. Page 14 In 2006, México innovated in region and the world, developing a “insurance” for catastrophic earthquakes. The “insurance” is supported by cat-bonds and high rated reinsurance and provide resources for emergency expenses. The “insurance” indemnify to Fonden (Mexican Calamity Fund) if met the following requirements: –A state of emergency declaration issued by the Ministry of the Interior of Mexico and published in the Mexican Official Gazette, –Epicenter location in or on the boundary of a Zone, and –the following magnitude and depth requirements:

15. Page 15 In 2007, the World Bank developed an insurance mechanism for the Caribbean countries, that provides resources for emergency expenses after hurricanes and earthquakes. Caribbean Catastrophe Risk Insurance Facility (CCRIF) The trigger conditions are: –Period: starting in June 2007 to June 2008. –Payout according to parametric formulas.

16. Page 16 1.The high incidence of infrequent cat-events 2.Approaching to new markets: governments in developing economies 3.Some successfully stories 4.Potential new solutions: creating new markets Agenda

17. Page 17 Today there are several financial instruments created for developing countries. Lessons learned from those financial instruments: The Mexican calamity funds show us how to implement efficient retention strategies –This strategy generated a efficient framework for build in excess of loss insurance coverage for transfer high layers of risk to insurers. The Mexican transaction showed us an important interest from the international financial community (capital and reinsurance markets) in taking risk from developing countries. The work designed by the World Bank for the Caribbean community shows us important benefits for developing countries: –Create strategies for risk compensation in time and geographical. –The countries altogether could generate a critical mass in order to manage its risks. –Economies scale, sharing administrative costs and related cost with risk transfer strategies.

18. Page 18 Some final remarks The natural disaster losses and its frequency in the world have experimented a clear increment. Larger countries can often absorbed the impact of big natural catastrophes, compensating the losses geographically, in revenues from affected zones with the revenues of unaffected zones (Arrow and Lind, 1970) or in time through intertemporal retention (debt). However, developing economies have a limited capacity to spread its risk geographically and in time. There are numerous financial solutions for governments as insured, it are ready to be implemented for others countries. Government needs are a potential target market for insurance solutions.

19. Presentation prepared to: The International Catastrophic Risks Forum 4th Edition “Catastrophe Risk Management Strategies for Governments of Developing Countries” October 1st-2nd, 2007, Bucharest, Romania Víctor Cárdenas, Advisor for the Ministry of Finance of Mexico Consultant in Catastrophe Risk Management Former Deputy Director of Catastrophe Risk in the Ministry of Finance of Mexicovictor_cardenas@yahoo.com