The Cost Of Catastrophe: Assessing The Impact Of Natural Disasters
July 7th, 2016
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Earthquakes. Wildfires. Floods. So far, 2016 has seen natural disasters wreak havoc on properties and people. Natural disasters cause huge amounts of economic damage each year, most of which is uninsured – and, in some cases, uninsurable.
There is a massive disparity between different regions across the world over the degree of economic loss caused by catastrophes and how much is covered by insurance. Between 1980–2015, catastrophes inflicted $1.96 trillion of economic losses on the Asia-Pacific region (APAC) with only 10% covered by insurance. This is in stark contrast to the U.S., which suffered similar economic losses at $1.65 trillion, but had 45% insurance coverage. Businesses need to be better prepared to improve their resilience to such shocks – this starts with understanding the nature of the risk.
Among the many different types of catastrophes, some clearly stand out in their capacity to inflict vast economic damage as well as human suffering. Three major earthquakes in April 2016 – driven by two tremors in Japan’s Kumamoto region and one in Ecuador – caused nearly $35 billion in economic losses. This has pushed losses for the first half of 2016 to be well above short-term averages. During the last decade, earthquakes and flooding have accounted for more than half of all economic losses, while the former alone caused 52.8% of all catastrophe fatalities – some 355,000.
Both the immediate and long-term economic impact of catastrophes are often misunderstood due to their complexity, which compounds the process of creating disaster plans. Businesses need to understand the financial risk that catastrophes pose to their supply chains and markets across the world. With a clear understanding of the complex effects of catastrophes, businesses can better quantify potential losses and develop more effective strategies to mitigate risk.
“More people are affected by natural disasters today because there are more people in the world to be affected. But beyond basic statistics, natural disasters may be getting more expensive because more people are building more expensive infrastructure in areas that are prone to natural disasters, like coastal areas, fire-prone forests, steep mountain slopes, and riverbanks.” – NASA Earth Observatory
“Three major earthquakes in April caused nearly $35 billion in economic losses alone. This has led to elevated losses during the first half of 2016 on a global basis as we head into the third quarter – which is historically the costliest of the year. To help quantify and prepare for consequences of this scale, our computer models and seismology experts re-simulate catastrophic events that helps better manage a response – including claims payment and reducing the period of recovery.” – Goran Trendafilovski, Catastrophe Model Developer, Aon Benfield