NCPA - National Center for Policy Analysis

Counting the Cost of Calamities

January 23, 2012

While the loss of life due to natural disasters has undoubtedly decreased over the course of the last century, the financial cost has skyrocketed.  Five of the 10 costliest events since 1980 have occurred within the last four years, but researchers are quick to point out that this is not because natural events are becoming more drastic.  Rather, it is the concentration of population and industry in event-vulnerable areas that has created this trend, says The Economist.

  • Natural disasters caused a record amount of economic damage last year, according to reinsurer Munich Re, which estimated economic costs at $378 billion, breaking the previous record of $262 billion in 2005 (in constant 2011 dollars).
  • The Organization for Economic Cooperation and Development estimates that by 2070, assets exposed to coastal flooding will rise from 5 percent of world gross domestic product to 9 percent.
  • A World Bank study estimated that between 2000 and 2050 the city populations exposed to tropical cyclones or earthquakes will more than double, rising from 11 percent to 16 percent of the world's population.

Much of the world's aggregate exposure is concentrated in only a small number of regions and cities.

  • Howard Kunreuther and Erwann Michel-Kerjan, disaster experts, estimate there are now nearly $10 trillion of insured and assets along the hurricane-prone coast from Maine round the Florida peninsula to Texas.
  • Jakarta, the capital of Indonesia, has seen its population double since 1980 and has dealt with this boom by redirecting waterways -- the result is that 40 percent of the city is below sea level.
  • Some 60 percent of the Netherlands is either under sea level or at risk of regular flooding from the North Sea or the Rhine, Meuse and Schelt rivers and their tributaries.

Often, these pools of excessive risk exist because of perverse government incentives.  In the case of American residents knowingly settling on the hurricane-prone Atlantic coast, federally subsidized flood insurance is at least partly culpable.  Furthermore, emergency disaster relief provided by the federal government usually covers between 75 and 100 percent of the cost of damages.  By acting as an emergency safety net, the government implicitly encourages this risky behavior that increases the cost of somewhat predictable natural disasters.

Source: "Counting the Cost of Calamities" The Economist, January 14, 2012.

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