September 19th, 1985, started like any other typical Thursday in Mexico City. People were rushing off to work and to school or were still half asleep in bed when the ground started trembling. At first, everyone carried on with their activities thinking little about what was happening around them but soon the ground was lurching so strongly that as much as people tried, it made it impossible for them to get to safety. The lack of knowledge about how to protect oneself during ground tremors left too many exposed to injury and death.
The cause of the shaking was an earthquake. But the earthquake epicenter did not occur in Mexico City. Rather, the epicenter of the 8.1 magnitude quake was over 350 kilometers away, off the Pacific Coast of Michoacan. Despite Mexico City's distance from the epicenter, this earthquake is now regarded as the most significant and deadliest natural catastrophe in modern Mexican history.
The damage was driven by a unique confluence of circumstances: the city's development on an ancient lake bed, an extremely powerful main shock and a strong aftershock the following day, and long period seismic waves. In its wake, the earthquake left an estimated 10,000 fatalities, 40,000 injured and 350,000 people homeless. Over 400 buildings collapsed and an additional 3,100 were seriously damaged. The economic damage was estimated at USD 4.1 billion (1985 USD), of which an alarming 88% was uninsured.
In the last 30 years, the population in the country and Mexico City has increased 60% and 30%, respectively. The country has experienced rapid growth and has now become one of the most advanced governments in closing the gap between the insured and total economic losses, known as the 'protection gap'.
If a repeat earthquake were to occur today, more than 2 million people would be at risk. Additionally, we estimate that the economic loss would be USD 15.6bn, of which 12.4bn would be uninsured, about 1% of Mexico's GDP. The private insurance penetration is higher now than it was in 1985, but the protection gap is still 80%, which is a major cause of concern.
While on a business trip in Mexico City back in June this year, a survivor recounted about being trapped beneath a collapsed building for 36 hours. "We didn't know what to do" and "we didn't have any respect for earthquakes" was part of the narrative that left a lasting imprint on me. I can't help but wonder: "Is the city ready today?"
The Mexican government has taken some steps to increase preparedness. It now runs frequent earthquake simulations led by the National Center for Prevention of Disasters (CENAPRED), and has established programs such as the "Seismic Alert System from the Center for Seismic Instrumentation and Register (CIRES)". It has also moved to protect some of the city's structures by establishing state-of-the-art building construction codes.
For all the earthquake awareness and building codes, the words must translate into action. For instance, while there is a good building code in place, they are mostly enforced for large commercial and critical constructions (e.g. hospitals), but not necessarily for non-engineered construction types (e.g. structures with a soft story or a short column), which account for 40% of Mexico City's building stock. Certainly, the development and dissemination of the economic confined-masonry construction has improved the overall residential building stock vulnerability.
Closing the protection gap
In an effort to close the financial gap in the wake of a natural disaster, the federal Mexican government has implemented a holistic disaster risk financing strategy, leveraging the various resources and expertise of government institutions, the private sector and development agencies.
In 1996, the Fund for Natural Disasters (FONDEN) was created, with the mandate to provide sufficient resources for federal and state entities to recover without compromising already allocated spending. FONDEN turned to the private sector to purchase innovative risk transfer solutions to increase funding during extreme loss years.
The first risk transfer solution is a traditional indemnity policy, covering federal and state assets such as infrastructure and healthcare facilities. The second is catastrophe bond known as MultiCat, which protects against earthquakes and hurricanes. The bond, which matures in late 2015, uses a parametric index (moment magnitude in the case of earthquake and central pressure in the case of a hurricane) to determine if a payout is required.
Numerous studies have demonstrated that communities with a mature and robust insurance market recover more quickly in the aftermath of a natural disaster. Having
insurance avoids the frustrating and expensive process of "having to start from zero", which benefits not only an individual's finances but physical and emotional health as well. Thus, the disaster risk financing strategy taken at the federal level must be translated down to the individual.
The Mexican insurance industry has been active. Led by the Market Association of Insurers (AMIS), a Plan for Meeting Natural Disasters was developed in 2013, and went live in September 2014 after Hurricane Odile. The initiative aims to centralize the post-event plan of action, such as defining key meeting points for the members of the sector (e.g.: adjusters) or contingency plans, in order to accelerate the insurance sector's response and thus providing financial relief to the affected faster. It also contemplates the design of products that can be affordable to micro, small and medium business enterprises (MiPyMES).
The MiPyMES are critical to the Mexican economy. According to the Mexican Institute of Statistics and Geography (INEGI), about 64% of employment in the country is provided by this type of business. Yet, insurance coverage is not a priority in this sector and only 4% of them purchase insurance. A severe event like the one discussed in this article has the potential to financially devastate a sizable number of MiPyMES entrepreneurs. The heavy economic burden of restocking, fixing, and rebuilding the business, as well as the costs associated with business interruption would be placed squarely on their shoulders. It can be extremely difficult, long and painful to recover from something like that.
Equally alarming is the low insurance penetration for residential homes. According to the National Commission for the Protection and Defense of Financial Services Users (Condusef) and AMIS, as few as 5% of Mexican homes that are not tied to a credit mortgage are insured. Such market behavior is often attributed to "lack of information, and lack of both financial insurance culture". In other words, most people hold on to the belief that "It won't happen to me".
Mexico is a seismically active country and more damaging earthquakes will inevitably occur in its future. The country has made great strides in ensuring that if an earthquake comparable to the 1985 quake does occur, its population will be safer. For all the progress, more can be done to further blunt the financial and physical impacts of a large earthquake event in Mexico.
The insurance industry is invested in building the financial resilience needed and has an opportunity to increase its role. The Mexican government is committed. Ultimately it is our responsibility as individuals to invest in our own financial resilience and protect ourselves against future hardship after a disaster.
Mexico is a nation characterized by its great solidarity. As a Latin American, I truly identify with the pain and suffering that earthquakes of this magnitude can inflict on the Mexican people. I believe they have shown great initiative in preparing for a repeat earthquake, but at the same time, I can't help but express my concern for what may still need to be done.
You can find the story in Spanish here: ...
Category: Climate/natural disasters: Earthquakes, Resilience
Location: Mexico City, Mexico