Study: What is driving the rising cost of natural disasters?

Prof. John McAneney Managing Director Dr. Ryan Crompton Chief Research Officer, Risk Frontiers, Macquarie University Australia


Flood in Bangkok. October 2011. Thailand

It is a widely held view that climate change arising from human activity is increasing the cost of natural disasters. This perception is false.

While it is undeniable that the economic cost of natural disasters is rising rapidly, it is doing so because of growing concentrations of population and wealth in disaster-prone regions. So far studies of long-term insurance or economic disaster loss histories caused by extreme weather -tropical cyclones, floods, bushfires (wildfires) and storms- have been unable to identify a contribution from human-induced climate change. This is true for many different natural perils and across jurisdictions.

Given the inter-annual variance of natural disaster losses, identifying a climate change contribution with statistical confidence faces a formidable signal-to-noise problem. At least in respect to US tropical cyclone losses and based on current climate change projections, the emergence timescale has been shown to be of the order of many decades to centuries.

(The emergence timescale is the time taken for a climate change contribution to the losses to emerge with high statistical confidence). This being the case and in the absence of scientific clarity, decisions relating to climate change will have to be made in a climate of uncertainty and ignorance.

The uncertainty about actual outcomes of a warmer climate in terms of extreme weather and property damage strengthens the case for increased investment in disaster risk reduction for its own right, and as part of climate change adaptation policies. Risk-informed land use planning practices, hazard resilient building codes and defence measures such as flood levees hold the key but their implementation will require unpopular political decisions. Without such efforts the cost of natural disasters will continue to rise. Insurers have the benefit of being able to update their views of risk every 1-2 years, and so climate change should not be a main concern for the industry as long as underwriters understand company exposures, and price risks accordingly. Over time, good underwriting practice can send a strong message to government and homeowners to encourage risk-reducing behaviours.

In conclusion, it is unlikely that insurers will be materially threatened by anthropogenic climate change. However insurers can play an important role by pricing risks accordingly thereby sending clear price signals to homeowners and governments to encourage risk-reducing behaviours.

Full paper here:  http://www.mapfre.com/mapfrere/docs/html/revistas/trebol/n67/en/articulo1.html

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26 thoughts on “Study: What is driving the rising cost of natural disasters?

  1. Does anyone remember the story of the 3 little pigs and the wolf?
    Parable on being prepared for disasters.
    We teach our children these stories, yet as adults, so many of us fail to take heed of the message they contain.

  2. The weather events always occurred – just few were living there. Now, each weather event affects the lives of people – so they are deemed disasters and indeed they are but is it the fault of the weather or the ignorance of people who don’t bother to look to history.

    Being an old country type I know what a flood plain looks like. So many urbanites have no idea and councillors forget as often there is a long time span between events in any one spot, so they allow people to build where they should not. Nobody listens to their Granny any more – ‘In my day ….’

  3. “uncertainty and ignorance” . If the odds of each locale getting hit with each kind of event were known precisely, both insurer and insured would have an exact expected loss per year, and premiums would gravitate immediately to neutralize that number. Insurer profit would be a transparent addition. In such an environment, insurers would go out of business, quickly. It is in their best interest to keep the insured ignorant and fearful.

  4. Muller of BEST says in his Physics for Future Presidents. / Physics 101 lectures that there is NO rise in costs if adjusted for inflation. Now somebody go tell the presidents of the the world, because according to Muller, EVERY president should know about the basic facts imparted in those lectures for informed decision making, hence the name…

  5. The cost of natural disasters is tied closely to the cost of insurance vs benefit. For most of our lives we pay for insurance and get nothing in return for it except comfort. Come a disaster and suddenly everyone’s paying more for insurance and buying more insurance, and because so much insurance money is available for recovery, the cost of recovery is very high. Approximately equal to the available insurance coverage, in fact. Odd coincidence, that. Damn odd.

    Before a lot of insurance money was available we would have accepted that we lost everything in a disaster, and we worked to restore what we could based on what we needed. It was our money and we shopped for bargains and we didn’t waste a nickle. Now we replace crap nobody needs and we didn’t need prior to the disaster. We pad our claims with junk that was obsolete, dated, or worn out before the disaster struck. Who’s to know, eh? An hell, everybody does it, I mean, right? We treat insurance like a lottery we never lose, and like the principle has been a loan from us to the insurers and want our due. I miss the days when insurance was only a means to moderate risk.

    Insurance also leads to stupidity. Because we can insure anything even if it is built on quicksand, or a sandy spit, a coastal barrier island, or a river flood plain that Google Earth shows to be subject to vicious meanderings, we do, and we tap the shoulder of our insurance agent to compensate us for our crazy behavior when the certain disaster strikes.

    Guess what – there are lots of tornadoes in Oklahoma. What is the solution? More building, apparently. There should be a 100% penalty for building any construction in the Sooner State’s tornado alley. In fact Idaho should be happy to offer deep tax breaks to potential builders in Oklahoma to encourage them to move to Idaho. Disasters cost a lot because we’re stupid and we don’t know that our stupidity is costing us billions. Don’t expect the insurance companies to tell you this.

  6. sure to compare the cost of natural disaster you must correct it from the geographical growth of wealth…assuming you know how likely a disaster can occur in a given area of the world…

  7. The only real statement that counts is that it is a universally held view that there are more rotations of the Earth in a year than there are daily temperature rises and falls within a 24 hour period –

    http://www.universetoday.com/26623/how-fast-does-the-earth-rotate/

    The danger of this ‘global warming’ mess is that a prolonged exposure creates a condition where people in future won’t even register anything amiss,not even with the strongest effort and this has happened dramatically in the recent centuries when a small group decided to ignore the correspondence between the 24 hour AM/PM system and the Lat/Long system and announced to the world that the Earth doesn’t turn once in a 24 hour day despite all the effects including temperature variations dictating otherwise.

    Technically ,the adjustments between a background star and the central Sun occurs only after the 4th cycle where we add another rotation and 24 hour day to make up the orbital difference to return Sirius to the same point in space or rather the Earth to the same orbital position but the guys a few centuries ago decided to correct the position daily and created an unmerciful tangle.

    The damnest thing is that it doesn’t sink in either as a group of individually,I mean the idea that when you lose the connection between one rotation and all its effect within a 24 hour cycle you not only lose the mandate to discuss climate,weather and every known effect associated with daily rotation,you lose the ability to consider things as a normal human being can.

    “There is another astronomical effect you should know about that can change the time that the Sun is highest in the sky. This is a little hard to explain, but it also has to do with us watching the Sun from a tilted perspective. The Earth spins on its axis about 366 and 1/4 times each year, but there are only 365 and 1/4 days per year.” NASA

    http://imagine.gsfc.nasa.gov/docs/ask_astro/answers/970714.html

    It is a basic human right that every student and adult learn not only that the Earth turns once in 24 hours but how that value was arrived at in tandem with the Lat/Long system. I see this website is equally as deficient in realizing just how dire the position actually is as the mainstream education system is as to how people approach the connection between dynamics and terrestrial effects at the most basic fact imaginable.

  8. Reasons for costs rising:

    1. More infrastructure built in areas where climate extremes take place.
    2. Cost cutting driven by profit imperatives mean that the infrastructure built is less likely to withstand the effects of aforesaid disasters.
    3. Insurance companies not costing insurance premius correctly, thereby attracting folks to build in the stupidest of places without spending the money necessary to be safe there.
    4. The media colluding with speculators to misinform the general public, allowing both to make money through guiding the misinformed to life in disaster zones.
    5. Etc etc etc.

  9. Felflames says:
    January 5, 2014 at 12:08 am

    The moral of the story is that people who live in brick houses are prone to get hurt in earthquakes unless they have steel reinforced walls. And people who live in flammable houses should carry fire insurance. And if there is a wolf in the neighborhood it is good to own a gun.

  10. Old woman of the north says: @ January 5, 2014 at 12:43 am

    Being an old country type I know what a flood plain looks like. So many urbanites have no idea and councillors forget….
    >>>>>>>>>>>>>>>>>>>>
    Isn’t that the truth! During Hurricane Fran (1996) I stood half way down my property and stared at flood water several feet deep covering over a half mile to the river’s bank. Now there are several new houses built on that flood plane next door to me. IDIOTS! It is not like that hurricane was long long ago either or that I didn’t warn them when I saw the construction starting.

  11. People have a right to live anywhere they like. But they should and must take the bad with the good and pay for living there. Then along comes elected officials who, seeking to gather support for their reelction, stick their noses into a free market and pass all kinds of laws and subsidies to favor those who could provide the most in campaign contributions. And where do those in Florida who could provide the most in campaign contritutions usually live? Along the coast. And who is currently trying to prevent an increase in flood insurance for those people? Their elected officials. Money talks, period.

  12. Flooding, flooding everywhere and on the nightly news, nary a mention of the flood plain. With sanctimonious self-righteousness, the local investigative reporter will cover corrupt politicians and greedy businessmen and never take on the really stupid homeowner who lives on a flood plain where flooding is a regular event every spring as the snows melt.

  13. What about regulation? We can’t just go repair and rebuild something, we have to file endless paperwork and enduring inspection after inspection after inspection. All those lawsuits from the environmentalists? They affect rebuilding as well as new development. (BTW, as a homeowner, I’m in favor of strong building codes.)

    There are also laws against price gouging in many states. After a natural disaster, merchants can’t raise the price on new materials enough to prevent shortages. This causes unnecessary delays because the materials won’t be distributed to the places that need it most.

  14. “What is driving the rising cost of natural disasters?”

    Hmmm…

    and may we wonder what is driving the rising cost of unnatural disasters, such as the unnecessary CO2 emission regulations?

  15. Can you imagine the damage and dollar value if The Long Island Express or the Great Colonial Hurricane hit the same places today?

  16. Here’s a relevant comment I posted here 14 months ago:

    Here are a few possible non-natural causes of increasing insurance claims:

    1. Greatly increased pleasure boat ownership and average pleasure boat value. (A proxy for this would be number and size of marinas and size of average berth in marinas. Another proxy would be annual sales of such boats, probably available from the Dept. of Commerce and/or some trade association.)

    2. Increased use of frozen food, and ordinary food like meats stored in a freezer–which goes bad in an outage. Plus larger modern refrigerators store more perishable items, enabling people to shop less frequently, but putting more value at risk.

    3. Increased issuance of official evacuation orders, and increasing compliance with them. These save lives but, with residents no longer in place, there’s less likelihood of vulnerable household goods being sheltered or moved to a safer location within the house during a storm or flood, of broken windows being patched up, etc. Also, there’s greater vulnerability to looting.

    4. Increasing forest grow-back in the NE of the US may have made electrical lines more vulnerable to falling trees.

    5. Possible lesser strictness with insurance claims by insurers, owing to one or both of these factors: A) Greater off-loading of risk onto reinsurers;

    B) Legally mandated standards for payment of claims. (I.e., in the litigious US, homeowners whose claims have been denied must have sued and established case law that certain rules of thumb insurers used to use to estimate the value of losses, or allowable types of claim, were too ungenerous. I think this could be a big part of the explanation, and one that outsiders would likely overlook. But my thesis is supported by the much greater increase in insurance payouts in the litigious US compared to other regions, per Munich Re’s figures. I urge researchers to probe this by, as a first step, interviewing veteran insurance agents to see if there’s anecdotal support, then checking trade journals of the industry to see if this trend was reported on in them. One clue might be the cost to insure per unit insured. If the cost of insurance is higher in the areas of the US that haven’t had increased disasters in recent decades, this could point to lesser strictness with claims as an explanation.)

    6. Possible higher-insured-house-values, due to pressure from mortgage holders (bankers, etc.). If the bank now wants, say, 90% of a house’s value to be insured compared to 50% 40 years ago, then claims will increase.

    7. Possible interaction between creeping inflation and fixed deductibles. If mortgage holders set a standard 40 years ago of $1000 for deductibles (say), or if that is what is habitually chosen, then inflation will ensure that damages over the deductible amount will increase over time.

    8. Possible increasing readiness of insureds to file a claim, owing to greater sophistication about interacting with such paperwork, greater ease of doing so (e.g., online), greater assistance from emergency management agencies, more sources of information online, and greater litigiousness and lesser stoical acceptance of fate, etc.

  17. If the insurance companies think that they have it bad now they should wait to see how bad they will have it with a drop of 2C in average temp.
    Flooding of rivers is directly related to the amount of human induced development, what is of importance is the amount of rain that actually falls. Is there a trend? To hear that there has not been as much rain in 50 years only means one thing.
    Hurricane count down, tornado count down, never grown as much food on the same acreage, if these are a result of 0.5 C increase in temp no matter who or what caused it it would seem that we are on to a good thing.

  18. dp says onJanuary 5, 2014 at 12:58 am

    RE building in tornado areas and other disaster areas:

    Build out of concrete and the structures can survive most natural disasters, with concrete floors and ceiling decks and heavy steel shutters… and concrete does not cost much more than a wood-framed house.

    I designed and patented a solid concrete wall building system in ~1996 that has done very well in the marketplace. Not a plug – I sold out long ago.

    http://www.cement.org/homes/ch_sb_builtto.asp

    Safe and Sound
    When disaster threatens in the form of hurricanes, tornadoes or wild fires, your family will be safer in a home constructed with concrete walls. It’s no accident that concrete is the material of choice for modern day fortresses and disaster shelters. This strong, durable material stands up to the fury of nature…including the more subtle threats of rot, rust and termites. Today’s strongest residential wall systems are made of concrete.

  19. A couple of thoughts.
    People want the freedom to choose. They’ll accept that. What they don’t want is the consequences of a bad choice. Via some convoluted reasoning they conclude that someone else is responsible for and should pay for their bad choice.
    In addition to that thought.
    Rising cost. How much are they really rising compared to past events? As a rule of thumb I divide the cost of a past event by 20 if they occurred before around 1950. An ounce of gold was still worth about $20 then. Then multiply by the current price of an ounce of gold. That will give an idea of the past event’s cost in today’s dollars. I know that’s not a precise comparison but it does put things in the ballpark.

  20. Blame it on insurance. Once upon a time, my house was burglarized. Thousands of dollars of stuff (lawnmowers etc) was stolen. But I had insurance.
    Problem was, the insurance company would not pay for the lost stuff, even though it was thoroughly catalogued, and its condition recorded in photos. I was supposed to get replacement at current cost.
    Well they did agree to that; but I had to go out and buy the new stuff myself, with my money, and then submit the receipts, which they then paid for. They only gave me 12 months to replace everything. Some things were irreplaceable. I was able to replace about 1/3rd of what was taken, in that 12 months; the rest was a total loss. My new stuff was stolen within the next ix months. My third new lawn mower is now somewhere else, and not on burglary lane.
    Same deal for disaster losses; the insurance company pays you to rebuild in time for the next flood or tornado in the same place.

  21. Individual knowledge of war has been down that same path. Prior to the civil war, individual knowledge and concern about war was scarce. And then photography and the printing press came around and made war an individual and highly political event in every individual. Indeed it may be the case that the frequency of war has been reduced, but its worrisome nature has increased simply due to media coverage. It is hard for individual folks to then calculate whether or not wars have increased in frequency. Media coverage instills belief that is stronger than the data.

  22. I’m currently reading a Kurt Vonnegut novel. One of the names of a fictitious company he uses is Life Assurance of California.

    Assurance is making sure and event does or does not happen (or changing the probability). Insurance is making sure resources are available when an event does happen.

    Emissions reductions do neither.

  23. Another driver of cost that I have seen (during the Calgary Flood 2013) is the recovery practices. Even 10 years ago, people would typically repair damage, now they are tearing out anything that has the slightest damage, and rebuilding. The cost is dramatically increased.

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