Sovereign financial disaster risk management: The case of Mexico

In 2006, Mexico became the first transition country to transfer part of its public-sector natural catastrophe risk to the international reinsurance and capital markets. The Mexican case is of considerable interest to highly exposed transition and developing countries, many of which are considering similar transactions. Risk financing instruments can assure governments of sufficient post-disaster capital to provide emergency response, disaster relief to the affected population and repair public infrastructure. The costs of financial instruments, however, can greatly exceed expected losses, and for this reason it is important to closely examine their benefits and alternatives. This paper analyzes the Mexican case from the perspective of the risk cedent (the Ministry of Finance and Public Credit), which was informed by analyses provided by the International Institute for Applied Systems Analysis (IIASA). The rationale for a government to insure its contingent liabilities is presented along with the fiscal, legal and institutional context of the Mexican transaction. Using publicly available data, the paper scrutinizes the choice the authorities faced between two different risk-transfer instruments: reinsurance and a catastrophe bond. Making use of IIASA's catastrophe simulation model (CATSIM), this financial risk management decision is analyzed within the context of a public investment decision.     

Can forest policy contribute to solving the CO2 problem?

The steady rise of atmospheric carbon dioxide concentration is due to the combined effects of fossil fuel burning and large scale deforestation. World-wide large scale reforestation could provide, within 15–20 years, an additional biospheric sink of the order of magnitude of the present input. Its capacity would be limited to a time span of several decades, but this time could be used to develop and deploy altenative energy sources (solar, geothermal and others) which presently are unavailable for immediate large scale use.