Improved financial management of Mexico
Mexico’ss Natural
Disasters Fund using advanced risk-estimationt ltools
Mario Ordaz

10th International Workshop on Seismic Microzoning andRisk Reduction
Tokyo, September 2013Mexico

In order to face the economical impact of frequent as wellas catastrophic events on the Federal property,
property Mexico
Mexico’ss
Federal Government established in 1996 the Natural
Disasters Fund (Fondo de Desastres Naturales, FONDEN)

Erogaciones del FONDEN por Tipo de Evento
Periodo: 2000-2006

1.4%
7.0%

88.1%

3.5%

GEOLOGICOSHIDROMETEOROLOGICOSINCENDIOS FORESTALESSEQUIA

Fuente: Secretaría de Gobernación

Average annual loss in the last 15 years (Federalproperty): about 2000 million USD

At the beginning, FONDEN operation was more an
aid scheme than a risk management instrument
Losses were covered using only fiscal money, whichcaused frequent cash
cash-flow
flow troubles.
troubles (Average annuallosses in the last 15 years: about 2,000 million USD)
But the possibility existed of the occurrence of anevent that demanded far more resources than thosearbitrarilyto the Fundy assignedgLack of knowledge of the risk made it impossible tohave technical criteria to determine the right size of
the Fund and to design risk-transfer instruments

So the Ministry
y of Finance launched a pprojectjaimed to construct databases and develop tools tocorrectly
y estimate the risk to Federal property
p p y dueto the combined effect of several natural hazards
Here, we will present these tools and some results

Main objective
To develop a system to estimate economical losses
to houses and infrastructure,
infrastructure as well as population
potentially affected by natural events

Expected results
R-FONDEN should compute risk measures due totheh combined
bi d effect
ff off severall hazards,
hd byb eachhhazard alone, by sector, and by all sectors
combined.
bi dRequested economical risk measures:
Expected annual loss
Loss exceedance curves
P b bl maximum
Probable
ilossesl(PML)What is interesting?

Results for the Government are not only databases
and loss curves, but a stand-alone computer
system (R-FONDEN)
R-FONDEN can be operated by the Governmenti d
independently
d tl off theth developersd l(II-UNAM(II UNAM anddthe firm ERN Consulting Engineers)i hi theh Public
bli Administrationd i ii a new process
Withinhas started in which rational risk management is(fi ll ) someone’s job(finally!)j b

What is interesting?

The ssystem
stem is designed with
ith an integrated
approach able to perform multi-hazard risk
analysis.
analysis
In fact, the computing engine is peril-blind, in thesense thath it
i doesdnot knowkwhichhi h peril
il isi being
b ievaluatedHazard, vulnerability and risk representations areconceptually and operationally equal for all perils

What is interesting?

The system includes a set of tools and postprocessing applications designed to facilitate risktransfer computations

Classic risk-computation approach
HazardLoss
Economical

Human

Vulnerability

Exposure
Applications

Hazards included in R-FONDEN

Earthquake
Tropical cyclone (flood, wind, storm surge)
Non-cyclone floodLandslides
Hail
TsunamiVolcanic eruption
Wild fires

HazardWe use an event-based approach, common to allhhazards:
dDetermine all the ways in which a damaging event
can occur
Assigng occurrence frequencyqy to each of theseevents
Determine the spatial distribution of intensities foreach event (including site effects)

Earthquake

Site effects (earthquake)

Hazard representation

Geographical distribution of intensities (multiscale) for each event (scenario, intensity footprint)
Se eral intensit
Severalintensity measuresmeas res per peril
Probabilistic: two statistical moments of theiintensity
i are storedd
All information compressed in an AME object(ancestor of the more streamlined WB’s CAPRAAME object)

Vulnerability/ExposureLocate in space the exposed items
Assign them value
Classify them from the point of view of
their vulnerability (one classification perhazard)
The “goldengolden rule”
rule of the Ministry ofFinanceExposure examples

Medical units ((13,000),)

Bridgesg (7000)()

Schools (190,000)

Highways (136,000Km)

Public buildings

Vulnerability
Probabilistic intensity-damage relations for all classesof buildings (and each hazard)

E(D), SD(D)

2 story confined masonry building
2-story,
1.0
0.9
08
0.8
0.7
0.6
05
0.5
0.4
0.302
0.2
0.1
0.0EExpectedt d valuelStandarddeviation

0200

400
Sa (cm/s2)

600800Risk computation
Risk is measured with the exceedance rate of lossvalues p:values,ν ( p) =∑ Pr( P > p | event i)FiAll eventstii

Pi is the loss during event i, resulting, in general, of theaddition of numerous individual losses, probablycorrelated;
Fi is the annual frequency of occurrence of event i

R-FONDEN
Sismo

Huracán30000

SCT
SEDESOL
SEP
SSA

20000

10000

Pérdida (millones de pesos)

Pérdida (millones de pesos)

30000

0SCTSEDESOL
SEP
SSA

20000

10000

00200400600800
Periodo de retorno (años)

1000 0200400600800
Periodo de retorno (años)

1000

R-FONDEN

R-FONDEN

24

Risk management

Exceeedance frequeency (1/year)

1E+00
1E-01
1E-02
1E-03
1E-04
1E-05
1E-06
1E-07
100

1000

10000

100000Loss (Million USD)

This curve describes, in probabilistic terms, the (contingent)liability of FONDEN. It is impossible to do rational risk
transfer without this information

Risk-transfer tools

Different risk transfer strategies can be evaluated in search ofoptimization,
ti i ti given
ith currentt budget
theb d t andd market
k t restrictionst i tiRisk-transfer tools

Large rarelossesRisk retained by the Federal
Government
Risk ceded to insurance,
reinsuranceiandd capitali lmarkets

Smallfrequent
losses

Effects of risk-transfer instruments
Proportional risk-transfer
1E+00

Frecuencia de ex
xcedencia (1/añoo)

Pérdida Bruta

Pérdida Neta

1E-01

1E-02

1E-03

1E-04
10100

1000
Pérdida (MDP)

10000

Effects of risk-transfer instruments
Non-proportional risk-transfer1E+00

Frecuencia de ex
xcedencia (1/añoo)

Pérdida Bruta

Pérdida Neta

1E-01

1E-02

1E-03

1E-04
10100

1000

10000

Pérdida (MDP)

Conclusions

R-FONDEN has improved the risk management
obligations of the Ministry
Ministr of Finance regarding
Federal infrastructure in Mexico

Conclusions

Other interesting applications have come out: realtime expected loss calculations for hurricanes,
earthquakes and tsunamis
Scenario selection to test the strength of the Civil
Protection System at various levels
Application to State and Municipal property isb i studiedbeingdi d