Bracing for more natural disasters

This year started off with major floods in Brisbane, Australia. A month later a deadly earthquake struck Christchurch, New Zealand. In March a massive earthquake off the coast of Japan generated a tsunami 10 metres high that wiped out entire villages and crippled a nuclear power plant.

But 2011 is not an exceptional year for natural disasters: last year the earthquake in Haiti killed 230,000 – around the same number that were killed worldwide by the 2004 tsunami. In Pakistan floods inundated 62,000 square miles while in Europe heat waves killed 17,000 over the summer and early December saw some of the coldest temperatures in decades. 

Climate-related disasters

Scientists, environmentalists and disaster relief organisations agree that natural catastrophes are occurring more frequently and with greater intensity.

Most experts agree that we should brace ourselves for more of the same in the future. Since the early 1990s, the incidence of natural disasters has risen dramatically, although it is worth making a distinction between climate-related and seismic events.

Climate-related disasters have quadrupled in the past two decades, according to the humanitarian organisation Oxfam. Floods, droughts, heat waves, increased tropical storm activity and more intense hurricanes are thought by many to be a direct consequence of global warming. What is of particular concern to organisations like Oxfam is that it is the small and medium scale weather-related disasters – the ones that do not make headlines – that are increasing the most.

Seismic Disasters

Although there seems to be fairly widespread public perception that seismic events, particularly earthquakes, are on the increase, statistics do not support this.

The US Geological Survey has been recording the number of earthquakes and their magnitudes from 1900 to the present day. Their figures show that, particularly for magnitude 7 and up, the number of earthquakes per year remained constant for the past 100 years. The misconception probably stems from the advances in technology and mass communication: as there are 10

times the number of seismographs than there were in the 1930s more earthquakes are being detected, plus with modern media any such events are broadcast around the world, with graphic images, almost immediately.

It is worth noting though that while numbers have not increased, earthquakes are by far the deadliest of natural hazards: the Boxing Day tsunami and the Japan tsunami this year were both generated by massive earthquakes and the Haiti earthquake, although less powerful, killed as many as the 2004 tsunami. As in so many poor countries, many thousands were living in overcrowded conditions, in derelict buildings and shanty towns in Port au Prince. All too often building codes do not exist or are not enforced in developing nations, putting far more people at risk.

Population and Poverty

In Japan, where buildings are designed to withstand earthquakes, it was the tsunami, rather than the earthquake, that caused the vast majority of the damage. Although the earthquake was hundreds of times stronger than the Haiti one, the loss of life was only a fraction. Economically however, the Japan disaster has become the most costly natural disaster in history, with losses estimated at $300 billion.

However the severity of a catastrophe may be measured – loss of life, damage to property, economic loss – the vast majority of experts agree that the pattern is set to continue. As the global population continues to increase there will be more people in the world to potentially be affected by these disasters. Forty percent of the world’s population also lives on or near the coast and this number will also increase, putting far greater numbers in the path of potential hurricanes and tsunamis. Ten of the most densely populated cities in the world lie on active fault lines and as urban sprawl spreads, people will be forced to settle in high risk areas – flood plains, hillsides vulnerable to mudslides, etc.

Insuring against disaster

Because insurance companies often bear the brunt of the vast costs associated with natural catastrophes, it would be reasonable to assume that rates would therefore go up when these disasters occur. This is not always the case though, says Annette Jim,

chief underwriting officer with Island Heritage, an insurance company with a presence in several Caribbean islands. Hurricane Ivan was an example of how, following a short, sharp spike immediately after the hurricane, rates have in fact been decreasing ever since and are at an all time low.

The reason comes down to supply and demand: insurance companies use catastrophe models to assess the potential losses that could result from a given catastrophe. Based on this they purchase reinsurance, to manage their own risk.

Investors looking for a better rate of return provide capital to reinsurance companies. “By doing this,” explains Jim, “they increase the availability of insurance in the particular market and as with all things – supply exceeds demand thus bringing downwards pressure on prices.”

Reinsurers themselves purchase reinsurance from other reinsurers, who are based worldwide, so in extremely costly years, such as this year, with multiple disasters occurring one after another, every major reinsurer will have been affected. If reinsurance rates rise, this will have a knock-on effect on primary rates, as insurers try to cover their costs.

If predictions are correct and we are looking at more frequent and powerful hurricanes and other hazards in the future, full coverage insurance will become a must. However, when choosing an insurance company, Jim advises, “The premium cost should not be the main driver in the choice of an insurer.”

Other factors such as the capital of the insurance company, the reinsurance programme, the rating of the reinsurers and the claims philosophy of the insurer should all be considered to ensure you are financially as well protected as possible.