Disaster risk financing

Disaster risk financing is the arrangement, made before the event, of how a government or public body will pay for a disaster, with each instrument assigned to its own layer of loss. Mexico set up FONDEN (Fondo de Desastres Naturales) in 1996, a budget fund to rebuild after disasters. It then protected it with insurance and, in 2006, with the first catastrophe bond issued on behalf of a national government. That structure became the template for what the World Bank calls disaster risk financing: deciding in advance who pays for what, with which money, and how fast. The method is layering. Frequent, moderate events stay on the budget, through a reserve line or a contingency fund. The middle layer goes to pre-arranged credit, which the government draws on an emergency declaration. Rare, severe losses go to the market, through sovereign parametric insurance, a regional pool or a cat bond. The first two layers are financing, since the money is the government's own or is lent to it. Only the third transfers risk, and it costs the most per dollar of cover, which is why it is kept for the tail. The other variable is time: a parametric payout lands in days, a reconstruction loan in months, international aid on a date nobody can predict. A serious strategy stacks instruments to cover all three horizons and sets the use of funds in advance, or the money arrives quickly and leaks away. The limit is political more than technical. FONDEN was abolished by a congressional decree published on November 6, 2020, which wound up 109 public funds and trusts at once. A structure built over twenty years depends on a parliamentary majority as much as on the quality of its models. For the market, these strategies create identifiable sovereign demand, though it stays concentrated in a few layers and in countries whose premium is often partly paid by donors.