Insured losses set to rise as population shifts to urban areas

A report released today by the Institution of Mechanical Engineers states that as the world’s population shifts towards urban population centres, the growing numbers of people living in cities and urban landscapes increases the world’s susceptibility to natural disasters.

The report warns that the explosion of urban population centres across the developing world is leading to a large increase in people living in locations susceptible to natural disasters, a situation that is exacerbated by rapidly expanding informal settlements or ‘slums’. About 180,000 people move to urban areas every day, with 18% of all urban housing being non-permanent or ‘slums’ – which are particularly vulnerable to the impact of extreme natural events.

In addition many of the world’s largest cities are located in earthquake, storm and flood prone areas (three quarters of the world’s largest cities are located on a coast), and development of urban land is leading to the degradation or even total destruction of natural barriers like swamps, wetlands and mangroves. Globally, changes to ecosystems have contributed to a significant rise in the number of floods and major wildfires on all continents since the 1940s.

The report calls for a much greater focus on preparing people for the possibility of an extreme natural event occurring and building disaster resilience into communities – as opposed to concentrating largely on reactive relief initiatives in response to disasters after they have occurred.

The impact of natural disasters on international markets has increased as we move towards an increasingly globalised world – the economic damage as a result of the Japanese tsunami is estimated to be between $122 billion to $235 billion , with the disaster disrupting international supply chains that either pass through or originate in Japan, like the automotive and electronics industries.

Dr Tim Fox, Head of Energy and Environment at the Institution of Mechanical Engineers, and lead author of the report, commented; “Extreme natural events like earthquakes, storms and floods are not in and of themselves disasters. As was seen earlier this week in India with Cyclone Phailin, given adequate levels of preparedness and resilience many disasters could be avoided and lives and communities saved.

“The shift towards urban living means more people are locating on coasts, more of the land that historically protected communities from floods like wetlands and swamps has been removed thanks to inappropriate development, and there has been a substantial rise in the number of people living in informal settlements or city ‘slums’. This means more people are exposed to the risk of being involved in a natural disaster.”

“It is clear that much more needs to be done to focus international development funding on resilience and preparedness. There is also the need for engineers to be more involved in the short-term response to natural disasters that have occurred, to help ensure effective decisions are made for the longer-term. Expensive engineering and architecture isn’t the only solution – significant benefits could be achieved just by ensuring engineers are available to help locate temporary infrastructure such as camps and supplies of water, sanitation and energy, as well as transfer knowledge about resilience to local populations. Decisions made on these temporary solutions can place substantial constraints on future options for embedding resilience when reconstruction begins in earnest”

As well as the obvious development issues, this population shift to urban areas, particularly in natural catastrophe prone regions, has serious ramifications for the insurance, reinsurance and alternative risk transfer markets. Insurance capacity will be required to ensure coverage is available, this will in turn require reinsuring in the global catastrophe risk markets and no doubt some of this risk will eventually find its way into alternative reinsurance capital markets.

As population centres expand in catastrophe prone areas the world’s insurance and reinsurance markets can expect their losses to rise. Efforts to mitigate and create resiliance are key but so is a functioning risk transfer chain allowing coverage at the lowest level and reinsurance or capital markets risk transfer at the highest.

Download a copy of the full report, ‘Natural disasters: saving lives today, building resilience for tomorrow.’