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.

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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