Risk & Innovation

The Impact of Natural Disasters on the Global Economy

September 8th, 2015


While most natural disasters are fairly local in their impact, the worst can change the planet. The 1815 eruption of the Indonesian volcano Tamora pumped so much sulfur into the atmosphere that the world’s temperature dropped by 2 degrees Fahrenheit (1 degree Celsius) for two years afterwards. The March 2011 earthquake in Japan even shifted the earth’s axis, shortening the length of the day.

The economic impact on the world can be just as profound. The 2005 Atlantic hurricane season saw a record 28 storms, including seven major hurricanes. Hurricane Katrina took the headlines as the most expensive tropical cyclone in history by both economic and insured losses, but the season as a whole caused aggregate economic losses of US$209 billion, equal to the seventh most costly year on record for natural disasters.

Beyond the headline costs are the potential chain reactions of negative economic impacts to countries around the globe. With every region at risk of natural disasters, and supply chains and markets increasingly worldwide, it is becoming ever more important for businesses to develop robust disaster plans to reduce the potential impact. But to work out disaster plans, the starting point is to understand what that impact could be – and how events far from your core operations could hit your business.

In Depth

We live in a truly global economy, and we are regularly reminded of this fact whenever faced with a significant natural disaster. In the 10 years since Hurricane Katrina, the world has seen an annual average of 260 major natural disasters, with average annual economic losses of US$211 billion, insured losses of US$63 billion, and 76,000 lives lost, according to Aon’s latest annual Global Climate Catastrophe Report.

In 2014, 72 percent of global disaster losses were caused by extreme weather events, from hailstorms in Europe, drought to severe winter weather in the U.S., hurricane damage in Mexico to typhoon damage in the Philippines, and flood in the U.K., India, Pakistan and Afghanistan.

However, this is just for the major disasters. The figures don’t include any of the many smaller-scale floods, storms, earthquakes and other localized disasters that as a whole can cause even more disruption and loss.

Since 1980, weather disasters have caused an inflation-adjusted US$3.6 trillion in economic losses, with insurers paying out more than US$960 billion over the same period. Thanks to a combination of globalization, growing populations, urbanization and climate change, the impact has been increasing with each decade, with the first half of the 2010s seeing more economic losses from weather disasters than the whole of the 2000s.

The world’s costliest natural disasters

The economic losses caused by natural disasters can be immense – as seen by the costliest on record (in 2015 U.S. dollars, figures courtesy of Aon Benfield):

Rank Economic Cost (billions) Disaster Year Location
1 $221.6 Tohaku Earthquake / Tsunami 2011 Japan
2 $209.2 Atlantic Hurricane Season 2005 U.S., Mexico, Caribbean, Bahamas
3 $160.8 Kobe Earthquake 1995 Japan
4 $92.5 Sichuan Earthquake 2008 China
5 $81.5 Drought 1988 U.S.
6 $73.2 Hurricane Sandy 2012 U.S. Caribbean, Bahamas
7 $71 Northridge Earthquake 1994 U.S.
8 $60.6 Drought 1980 U.S.
9 $51 Irpina Earthquake 1980 Italy
10 $47 Floods 2011 Thailand

It can be hard to measure the indirect economic impact of such disasters, but the direct impact to businesses and individuals in the affected areas can be gaged by the value of uninsured versus insured losses (in 2015 U.S. dollars, figures from Aon Benfield):

Rank Insured Loss (billions) Uninsured Loss (billions) Disaster Year Location
1 $36.9 $184.7 Tohaku Earthquake / Tsunami 2011 Japan
2 $4.8 $156 Kobe Earthquake 1995 Japan
3 $104. 9 $104.4 Atlantic Hurricane Season 2005 U.S., Mexico, Caribbean, Bahamas
4 $0.4 $92.1 Sichuan Earthquake 2008 China
5 $1.9 $79.6 Drought 1988 U.S.
6 $0.7 $59.9 Drought 1980 U.S.
7 $0.6 $50.4 Irpina Earthquake 1980 Italy
8 $24.7 $46.4 Northridge Earthquake 1994 U.S.
9 $30.8 $42.2 Hurricane Sandy 2012 U.S. Caribbean, Bahamas
10 $16.2 $30.8 Floods 2011 Thailand

Every dollar of uninsured loss is a dollar that’s unavailable for investment and business growth. And on top of this, of course, is the human cost. Fatalities and injuries caused by natural disasters can impact businesses even more than the infrastructure and economic damage. Helping affected employees to recover – for their own wellbeing as well as that of your business – can be just as important a part of disaster planning and recovery as making sure that your insurance cover is appropriate.

And then there’s the potential impact on your supply chain.

Wider implications

Major disasters have the potential to disrupt economies far beyond the local damage to infrastructure, as businesses around the world can find their supply chains and markets hit in the aftermath. There’s hardly a business or consumer who doesn’t rely to some extent on goods and services from other parts of the world – and all parts of the world have different levels of natural disaster risk.

The 2011 Tohoku Earthquake and Tsunami and the 2011 Thailand Floods are perfect examples of how disasters that seemed to cause relatively localized damage to individual countries had far wider indirect economic implications. Because of the nature of the two countries’ economies, both disasters caused severe disruption to global technology supply chains.

After the Thai floods, there was a significant shortage of computer hard drives that sent consumer prices skyrocketing until factories were able to come back online. When the 2011 tsunami struck, several major car manufacturers were forced to shut production at factories throughout Europe and the U.S. due to a lack of available parts from factories in Japan, impacting multiple suppliers of parts throughout the wider global economy through a supply chain reaction.

With such broad potential impact, ensuring that your business is prepared for the potential disruption is increasingly important. Disaster planning needs to take into account not just the direct impact to your infrastructure, but how the after-effects of events far away from your base of operations could affect your supply chain and markets.

Talking Points

“We find robust evidence that national incomes decline, relative to their pre-disaster trend, and do not recover within twenty years… a 90th percentile event reduces per capita incomes by 7.4 percent two decades later, effectively undoing 3.7 years of average development” – The Causal Effect of Environmental Catastrophe on Long-Run Economic Growth, U.C. Berkeley, 2014

“We have seen a staggering escalation in economic losses from disasters, which act as a serious brake on sustainable development, job creation and the availability of funds for poverty reduction programmes, health and education” – Margareta Wahlström, UN Special Representative of the Secretary-General for Disaster Risk Reduction, March 12, 2015

“Natural disasters… do more than wipe out homes; they can wipe out businesses and decimate local economies.” – United States Department of Commerce, April 2, 2015

“If there is any plausible upside to major catastrophes, is that they often begin a conversation regarding infrastructure improvements and seeking ways to mitigate future risks and losses. These events can challenge the status quo and reveal the importance of minimizing the future risk of vulnerable populations and exposures.” – Steve Bowen, Associate Director & Meteorologist, Aon Impact Forecasting

Further Reading

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