It is difficult to put a positive spin on catastrophes but mitigation measures can go a long way towards business continuity and peace of mind. Scott McCulloch reports.
It goes without saying that natural disasters have a negative impact on our world. Earthquakes, hurricanes, tsunamis – all such catastrophes have economic and social ripple effects.
According to reinsurer MunichRe, 2018 was the fourth-costliest year since 1980 in terms of insured losses.
The overall economic impact of natural disasters was $160 billion, of which $80 billion was insured.
Sadly, 10,400 people perished in natural disasters last year. The second half of 2018 saw an accumulation of billion-dollar losses from floods, tropical cyclones, wildfires and earthquakes.
There’s growing evidence that excessive carbon output from humans is propelling climate change and increasing the number of weather-related disasters.
At the same time the world’s population and economic output is becoming concentrated in disaster-prone cities and regions.
By 2050, the UN projects that 6.3 billion people or 68% of the world’s population will live in cities, many of which are located near coasts, floodplains and fault lines.
“When natural disasters hit, the victims may feel as if there is no chance of recovery,” says Barbara Flowers, an economist at the Federal Reserve Bank of St. Louis. She adds optimistically: “In rare cases, the return to pre-disaster normal is impossible.”
Flowers believes it is far more likely that recovery can ultimately make conditions as good or better than they were before a disaster.
When Hurricane Katrina made landfall on Florida and Louisiana in 2005 it caused catastrophic damage, particularly in New Orleans. Total property damage? An estimated $125 billion.
As Katrina hit the Gulf coast fuel prices spiked, eroding profit margins of countless businesses due to higher transport costs. Why? Half of the gasoline consumed in the US passes through refineries that were struck by the storm.
New Orleans has not fully recovered, but in ways the city has improved over pre-Katrina conditions. One key advance is the city’s disaster-prevention infrastructure. Rebuilding continues and the population is on the rise.
So how can a family business or any business protect itself? For starters, proper insurance can limit economic and fiscal damage. Before disaster strikes, insurance pricing gives policyholders incentives to reduce their exposures through risk mitigation measures.
In the wake of a disaster, insurance moves the fiscal burden away from taxpayers to the private sector. This limits financial contagion by restoring supply chains and stalled business operations faster, while providing liquidity and certainty in business and financial planning.
True, post-disaster reconstruction can result in destroyed capital being replaced with newer technologies, machinery, factories and equipment. The “creative-destruction” process might even put an economy on a permanently higher growth trajectory.
But the financial and opportunity cost of upgrading lost infrastructure can be stratospheric. The net effect is unclear, according to the Insurance Bureau of Canada.
IBC’s research shows that large natural disasters have a negative impact on economic conditions. A typical disaster lowers economic growth by around one percentage point and GDP by about 2%.
“But major catastrophes can have even more pronounced effects,” IBC notes in a risk management report. “The 1995 Kobe earthquake, for instance, reduced residents’ GDP per capita by 13% over the long term.”
It is well known that natural disasters have become more frequent and severe. Since 1970, the average number of natural catastrophes worldwide has grown by almost 250% – from 39 in the 1970s to 136 in the 2000s, according to reinsurer Swiss Re.
Meanwhile, the United Nations Refugee Agency found that the number of natural disasters has doubled in the past 20 years.
The list goes on, as will tomorrow’s destructive weather events.
What to do? As the old adage goes, if you fail to plan, you plan to fail.