Earthquakes, droughts, floods, cyclones and other hazards impact over 200 million people every year. What financial safeguards should be in place to fund the recovery? As part of our Rio+20 series, Reto Schnarwiler, head of Americas and EMEA Global Partnerships at Swiss Re, explores risk management and resilience.
Each year features new headlines about deadly and devastating catastrophes in different parts of the world. Earthquakes, droughts, floods, cyclones and other hazards impact over 200 million people every year. Climate change, combined with population growth, could put many more at risk.
2011 was a particularly devastating year, with earthquakes in Japan and New Zealand, flooding in Thailand and Australia, storms and tornadoes in the US and winter storms across Europe. These natural catastrophes have cost more than 30 000 lives and caused total losses of over $360 billion worldwide - a new record. Of the $360 billion, only about $110 billion was insured. The rest of the bill was absorbed by individuals, corporations and the public sector.
Losses from natural disasters around the world are increasing. Globally, the financial cost of disasters have increased fivefold over the past 30 years - from an annual average of USD 25 billion in the 1980s to $153 billion in the decade leading up to 2011. Economic development, population growth and a higher concentration of assets in exposed areas have all contributed to this dramatic increase. Climate change is likely to increase many of these risks, ranging from more frequent and severe storms, floods and drought to sea level rise, crop failures and ecosystem disruptions. Earthquakes also continue to pose a threat to people living in regions affected by seismic activity.
Economic losses vary substantially by country and disaster event. The majority of these costs are not insured. On average, over the last 20 years only 20 to 40 percent were covered by insurance. Particularly in developing countries, insurance is not widespread and many citizens do not (yet) have access to insurance products. Compared to industrialized countries, where the average insurance penetration rate for property insurance is 3.6% of GDP, it is much lower in developing countries at only 1.4% of GDP. As a result developing countries face the largest gap between insured and economic losses and the majority of the losses relating to these events fall back on the individuals and the government. These challenging statistics are leading more economists, politicians and citizens to ask who foots the bill after a major disaster. While it is the public sector that re-allocates budgets, increases taxes, or introduces austerity measures, it is ultimately the man on the street that carries the burden.
Today's risk landscape is a complex one. In addition to natural disasters, factors such as an ageing population or fiscal challenges add to the increasing complexity and interdependency of risks in the modern world. For governments everywhere this presents a twofold challenge. They need to juggle the diverse risks they face and put solutions in place for financing short- and long-term impact, should the risks become reality. Strong public-private partnerships are a lifeline here as they enable the transfer of some risk to the insurance and capital markets - notable before disaster strikes.
A holistic, integrated approach to risk management is the best way to bring transparency and accountability. Governments need to identify and prioritise all potential risks to assess their severity and likely frequency. They are then in a position to implement targeted mitigation, like construction activity and legislation (e.g. land zoning, building codes). Open dialogue has to flow through this entire process to address the question of who can pay for the impact of risks. On completion of the groundwork, each government can draw on private sector expertise and resources to introduce measures to finance economic loss.
Strengthening communities' resilience to such events is therefore all the more pressing, particularly in developing countries where the vast majority of those affected live and where the impacts of natural disasters are felt most heavily. Swiss Re works with public and private partners to design and deploy risk transfer solutions that are customised to the specific risk exposure in these different parts of the world.
At Swiss Re, we work with corporations, governments, civil society organisations and academia to develop effective risk transfer solutions that make societies more resilient. Such collaboration has already produced a number of innovative transactions: weather-index solutions for farmers in Africa and India, agriculture insurance schemes for China, a catastrophe bond in Mexico (under the guidance of the World Bank) that transferred earthquake and hurricane risks to the capital markets as well as parametric earthquake and hurricane covers for 16 Caribbean nations and the US state of Alabama.