Natural disasters now cost the globe between $250 billion and $300 billion each year, as asset values increase and urbanisation expands bringing disaster risk management to the forefront of a sustainable future, according to the United Nations’ (UN).
The UN’s recently published, extensive report on global disaster risk management, “2015 Global Assessment Report on Disaster Risk Reduction,” highlights the importance of strengthening disaster resilience with focus on future trends and historic events.
The report, now in its fourth edition comes soon after the UN announced, through its “Natural Disasters in Asia and the Pacific: 2014 Year in Review” study, that natural disasters caused economic losses of around $60 billion in the Asia Pacific region alone, during 2014.
Discussing the global risk report Margareta Wahlstrom, UN Secretary-General’s Special Representative on Disaster Risk Reduction, whose office produced the findings, said; “The report is a wake-up call for countries to increase their commitment to invest in smart solutions to strengthen resilience to disasters.”
Something the insurance, reinsurance, insurance-linked securities (ILS), catastrophe bond and broader risk financing world has been doing for years.
A section of the comprehensive report emphasises this, reading; “Finance ministries, insurance regulators, international finance institutions as well as insurance, reinsurance and catastrophe modelling companies have also increased their involvement in developing and extending risk financing mechanisms such as insurance, contingency financing and catastrophe bonds.”
Continuing to note the creation of specialist funds such as the Caribbean and regional disaster risk financing initiative (CCRIF SPC, formerly the CCRIF) and the Pacific Catastrophe Risk Assessment and Financing Initiative (PCRAFI).
It’s worth mentioning here that specialist disaster pools exist beyond the two mentioned in the UN study including, but by no means limited to, the African Risk Capacity (ARC) and the Turkish Catastrophe Insurance Pool (TCIP).
But while risk financing vehicles exist and appear to be succeeding in increasing insurance penetration levels and ultimately strengthening economies’ resilience to the impact of natural disaster events, the UN’s findings signal further opportunities for the reinsurance and ILS market.
Looking to the future, the report predicts that in the built environment alone roughly $314 billion will be required to cover disaster losses, translating to more than $70 per working age person on earth.
Contributing to the rise in global losses is the impact of climate change and rising sea levels, with the UN warning that by 2050 40% of the world’s population will live near river basins that experience “severe water stress.”
Andrew Maskrey, the report’s author, uses the Caribbean as an example of just how much climate change could increase global losses from natural disasters, advising that by 2050 “average annual losses associated with tropical cyclone winds alone are projected to increase by as much as $1.4 billion.”
While 2014 and 2013 resulted in relatively low economic losses from natural catastrophe events, both total and insured average annual losses have been on the rise longer-term.
Despite the current catastrophe bond market having more than $22 billion exposed to global perils, a range of traditional and alternative reinsurance contracts protecting businesses and economies and numerous risk financing funds, the UN study highlights potential for the current abundance of reinsurance capacity to be deployed.
Whether this is through existing funds or new, innovative ventures that provide developed, and underdeveloped regions of the globe with the potential to recover quickly, financially and socially post-natural disaster it’s a must.
And the reinsurance, ILS and wider capital markets have the scope, scale and expertise to do just that.
Wahlstrom concludes; “If we do not address risk reduction, future losses from disaster will increase and this will impact countries’ capacity to invest money in other areas such as health and education.
“If we do not take the necessary measures now, it will be difficult to achieve development, let alone sustainable development.”