The Rising Risk Of Natural Catastrophes: Finance
Viewpoint by Stephane Roy, WCW Columnist
Putting aside the risks run by firms such as Lehman Brothers and the hoopla last week in the press about their shenanigans, natural disasters are occurring with an increased frequency. People are anxious understandably, but in many cases there is not much we can do. For example, Chile recently experienced one of the most powerful earthquakes ever, following the strong shaking Haiti incurred in January.
In each case, the death toll is high; and the words are missing to describe the human tragedy. Economic losses are significant; for example, the economic loss in Chile is estimated to be between $15bn and $30bn, about 10% – 20% of its GDP.
How should we think about natural catastrophes?
Should we be worried about more natural catastrophes? There are three general categories of natural catastrophes. The first one is caused by geological events (earthquakes, volcanic activity, tsunamis); the second type is created by atmospheric activity (either meteorological – hurricanes, wind storms, winter storms, tornados – , or hydrological – floods – ); and the third category is related to climatological activity (extreme temperatures, droughts).
Regarding geological events, there are probably not more earthquakes presently that there used to be in the past. Regarding atmospheric and climatological activity, observations have shown in some cases an increase in the number of events and in their severity. Whether this increase in activity would be related to climate cycles or amplified by climate change is an interesting but complex question.
Frequency and severity of natural catastrophes matters; but the perception of risk is tied to the number of people who live in these catastrophe-prone areas. Should there be more natural catastrophes in non-populated areas, these events would not be viewed as a threat.
More and more people live in catastrophe-prone areas, which is effectively why natural catastrophes are a rising risk to populations and economies.
Natural catastrophes are considered to be low frequency but high-severity events, meaning for example that an event of an extreme severity might occur once every 100 years in a specific area. Because these events in general don’t happen very often, it is easy to forget about them. It is however critical to be prepared to such events.
Governments have a prime role to play in the implementation of active prevention strategies. They can enforce stringent construction standards, develop specific site defenses, run emergency schemes, increase populations’ awareness and give them the necessary incentives to buy insurance to protect their lives and properties.
