United Nations: Economic losses linked to disasters are “out of control”

A report published by the United Nations Office for Disaster Risk Reduction (UNISDR) suggests that economic losses from natural disasters and catastrophe events have been dramatically underestimated in the past. The report suggests that economic losses from floods, earthquakes and droughts alone have been underestimated by as much as 50% and that the actual figure for direct economic losses from disasters this century could be as high as $2.5 trillion.

At the launch of the report, the UNISDR 2013 Global Assessment Report on Disaster Risk Reduction (GAR13): Creating Shared Value: the Business Case for Disaster Risk Reduction, UN Secretary-General, Ban Ki-moon, said; “We have carried out a thorough review of disaster losses at national level and it is clear that direct losses from floods, earthquakes and drought have been under-estimated by at least 50%. So far this century, direct losses from disasters are in the range of $2.5 trillion.”

One of the reports authors, Andrew Maskey, explained that many disaster events are only nationally reported and so do not get into the international media or international disaster databases. He commented; “If you add in all the nationally-reported disasters, which don’t get into the international media and the international databases, our impression is that losses are about 50 percent higher than is currently being reported, and losses are going up rapidly.”

The report is built on extensive analysis of existing disaster data sets, the team that created the report reviewed 40 countries national disaster loss databases, as well as survey responses from 1,300 SME’s in disaster prone regions of the Americas and reviews of risk management processes at 14 major international corporations.

UN Secretary-General, Ban Ki-moon, continued; “Economic losses from disasters are out of control and can only be reduced in partnership with the private sector which is responsible for 70% to 85% of all investment worldwide in new buildings, industry and small to medium sized enterprises. The principles of disaster risk reduction must be taught at business schools and become part of the investor’s mind-set.”

The report highlights how the rapid growth and transformation of the global economy over the 40 years has led to rapid and sometimes exponential increases in disaster risk in low, medium and high income countries. The report discusses how globalisation and the search for cost-efficiencies are driving businesses into hazard prone locations with little to no consideration for global supply chain consequences.

A newly developed global risk model, created by UNISDR and partners, shows that annual average economic losses from just earthquakes and cyclonic wind storms such as hurricanes and typhoons can be as high as $180 billion a year in this century. Last year, according to data from reinsurers Swiss Re and Munich Re, approximately 40% of economic losses from natural and man-made disasters were insured. As insurance penetration increases over the next few decades that percentage is likely to rise and if you factor in these extra economic losses that UNISDR has identified its clear that the insurance and reinsurance industry are going to have a lot more work to do.

UNISDR Chief, Margareta Wahlström, commented at the reports launch; “In a world of on-going population growth, rapid urbanization, climate change and an approach to investment that continually discounts disaster risk, this increased potential for future losses is of major concern. In the wake of the global financial crisis, disaster risk stands as a new multi-trillion dollar class of toxic assets of unrealized liabilities. The catastrophic economic losses from the Japan earthquake/ tsunami, floods in Thailand and the destructive Super Storm Sandy show clearly the extent of what is at stake.”

The report goes into great depth regarding disaster risk reduction and efforts that can and are being taken to mitigate the impacts of natural disasters and catastrophe events. The report also goes into some depth on risk transfer and the role of reinsurance and the capital markets in providing a robust and big large enough pool of capital to help both sovereign nations and corporations hedge the risk of disaster and recover more quickly after disaster strikes.

The report notes that disaster risk financing through insurance, reinsurance and capital market instruments such as catastrophe bonds is just part of the answer, but alone cannot help countries catch-up after disaster strikes and are no substitute for investing in risk reduction efforts. However risk financing and transfer has a very important role to play alongside efforts to minimise and mitigate disaster risk.

The report is lengthy and there are a number of sections which make reference to insurance, reinsurance and the capital markets as sources of risk transfer. It goes into some detail on the need for insurance and risk transfer to work in tandem  with disaster risk reduction efforts and cites the importance of pricing and information transparency within any market for disaster risk to also help facilitate investments in risk reduction.

It’s clear from the report that reinsurance and the alternative reinsurance capital markets have a key role to play as economic losses from disaster rise. We recommend you also read the article on insurance penetration which was published yesterday and consider this alongside the potential economic losses to give you a feel for the role that risk transfer will need to play as both aspects increase. If economic losses from disasters are spiralling out of control insured losses from catastrophe events are destined to rise with them.

You can access the full report via the UNISDR GAR 13 website here.