Weather & climate disasters have cost the global economy $2.4 trillion

Demonstrating the need to increase financial protection against weather, climate and water related disasters, a new report from the WMO shows that between 1970 and 2012 the global economy suffered a huge $2.4 trillion of losses as a result of these events.

The economic loss toll from these events is huge according to the report, perhaps bigger than has previously been thought. The new research undertaken by the World Meteorological Organization (WMO) and the Centre for Research on the Epidemiology of Disasters (CRED) of the Catholic University of Louvain (UCL) in Belgium, aims to provide decision-makers with actionable information for protecting life and property.

From 1970 to 2012 the report counts 8,835 disasters, resulting in 1.94 million deaths and US$ 2.4 trillion of economic losses as a result of weather or climate related disasters such as droughts, extreme temperatures, floods, tropical cyclones and related health epidemics.

The resulting report, titled the Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes 1970-2012 and downloadable in PDF format here, explains the distribution and impacts of weather, climate, and water-related disasters and also highlights measures to increase resilience to their impacts.

The report highlights the urgent need for improved reporting, standardisation and analysis of data on weather, climate and water-related hazards to better our understanding of disasters and to help reinforce the creation of policy and platforms for prevention and resilience.

It’s a timely report and helps to reinforce the work undertaken by the United Nations and World Bank on resilience to natural catastrophes, weather extremes and climate impacts, as well as the UN’s work on establishing a code of corporate conduct for disclosure of natural catastrophe and weather risk exposures.

In fact the report is seeking to inform the current debate on disaster risk reduction and sustainable development, which is a large part of recent work by the UN and World Bank. As such the data is important to the insurance and reinsurance sector, providing perhaps the best view of the gaping hole between economic and insured losses that we have seen to date.

The report states:

Storms and floods accounted for 79 per cent of the total number of disasters due to weather, climate and water extremes and caused 55 per cent of lives lost and 86 per cent of economic losses between 1970 and 2012, according to the Atlas. Droughts caused 35 per cent of lives lost, mainly due to the severe African droughts of 1975 and 1983–1984.

The 1983 drought in Ethiopia ranked top of the list of human casualties, claiming 300 000 lives, as did Cyclone Bhola in Bangladesh in 1970. Drought in Sudan in 1984 killed 150 000 people, whilst the Cyclone locally known as Gorky killed 138 866 people in Bangladesh in 1991.

Hurricane Katrina in the United States of America in 2005 caused the worst economic losses, at US$ 146.89 billion, followed by Sandy in 2012 with a cost of $ 50 billion.

The worst ten reported disasters in terms of lives lost occurred primarily in least developed and developing countries, whereas the economic losses were mainly in more developed countries.

“Disasters caused by weather, climate, and water-related hazards are on the rise worldwide. Both industrialized and non-industrialized countries are bearing the burden of repeated floods, droughts, temperature extremes and storms,” commented WMO Secretary-General Michel Jarraud.

“Improved early warning systems and disaster management are helping to prevent loss of life. But the socio-economic impact of disasters is escalating because of their increasing frequency and severity and the growing vulnerability of human societies.”

“Collecting global loss data that are comparable and complete is a major challenge. Climate and weather services are working with disaster-impact researchers and data centers to meet this challenge. This partnership is producing analyses that support practical decisions on reducing the human consequences of disasters, for example by investing in early warning systems or targeting the most vulnerable communities,” added CRED Director, Prof. Debarati Sapir.

Historically economic losses from disasters and weather events are thought to have been underestimated by as much as 50%, making the gap between economic and insured losses much wider than previously thought. Reports such as this latest one from the WMO help the insurance, reinsurance and insurance-linked securities (ILS) sectors to better understand the gap and the size of the opportunity to help to close it.

Narrowing this gap (perhaps gulf would be a better word), between economic and insured losses is a significant task and perhaps the best opportunity for growth that both the traditional reinsurance and insurance-linked securities (ILS) market will be presented with in the future.

In order to narrow this gulf reinsurers and ILS players are going to have to be innovative, resourceful, target new product development and target new regions, not with the goal of regional domination, but with the goal of facilitating the creation and support of local markets.

It is likely that reinsurers and ILS players are going to have to open their eyes to the contingent cover possibilities presented by the use of triggers based on parametrics and indices, as well as the use of satellites, sensing and the resultant data. In emerging markets these triggers can be more appropriate than ultimate net loss, especially as those requiring cover are often not typical insurable interests but rather economic interests.

A number of interesting and innovative initiatives are already trying to achieve this, with the facilitation and creation of new markets as much a target as the generation of profits. This requires a step-change in the way some traditional financial institutions and investors do business, something which is alien to many.

But, if we really want to narrow this gulf (gap), between the exploding levels of economic losses from natural disasters, weather and climate events and the insurance industries losses, a step-change is what is required. Without one it could be too late to really make a difference and the opportunity presented to re/insurers, ILS players and investors globally, to harness the returns of weather and catastrophe risk, could be lost forever.