The economic cost of natural catastrophes is rising all the time, so how can businesses safeguard against costly risks?

As the flash floods in the Indian state of Kerala in August reveal all too starkly, natural catastrophes continue to wreak havoc in human and economic terms.

Although cyclones and hurricanes have been landing for millions of years, normally peaking in the latter half of the year in the Arabian Gulf, Pacific and Caribbean, they are leaving behind measurably more damage.

In contrast to the steady decline in the number of deaths over the years, the economic cost of natural catastrophes is rising all the time. According to statistics compiled by Our World in Data at the University of Oxford, the number of global reported disaster events, such as floods, earthquakes, droughts and volcanos, stood at just below 300 in 2017. Although that’s down from more than 500 in 2000, it’s still historically high and the economic costs continue to soar.

In 2017, the global cumulative cost of natural disasters stood at $150bn, reports Our World in Data, citing statistics compiled by Brussels’ Universite catholique de Louvain, which maintains an international disaster database. That compares with less than $50bn in the peak year of the 1980s.

Blame the weather

As the UN’s disaster reduction agency, the UNISDR, points out: “Over 80% of current disaster losses are caused by weather-related hazards [that] are set to increase in frequency, intensity, spatial extent and duration as a result of changing climate.”

Basing its findings on the latest report by the Intergovernmental Panel on Climate Change, UNISDR predicts: “By 2050, in a business-as-usual scenario, there could be a nearly five-fold increase in the annual economic losses resulting from floods in Europe.”

Such are the risks that even central bankers are growing concerned. Just two months before an earthquake, measuring 7.8 on the Richter scale, hit New Zealand in the early hours of 14 November 2016, the Bank of England issued a prescient warning to the London market about “market-turning events”. According to the Prudential Regulation Authority that regulates and supervises the financial sector, these are defined as “complex, low-probability, high-severity events for which limited data might be available to quantify potential exposures accurately.” Because these events come out of the blue, the authority is worried that they could trigger such hefty claims that they may “in certain circumstances impact significantly a firm’s capital resources or its future business plans.”

The same observation could be applied to the private sector. “The risk of a natural catastrophe hitting your production site and negatively affecting your supply chain has never been greater,” stresses Alexander Mahnke, the president of Germany’s risk management association, GVNW.

International coordination

However, much can be done to limit the losses, both human and economic. “Only 30% of the higher flood risk can be attributed to climate change and increased rainfall,” the UNISDR concludes. “The rest is attributable to human behaviour, such as building in risk areas. Far from being natural, disasters are something that we can prevent or minimise their impact.”

The UNISDR believes the answer is international coordina­tion and collaboration. Following a calamitous 2014 in Europe, which saw nearly 160 disaster events that resulted in US$17.6bn in economic damage from floods and wildfires, the UNISDR developed a modus operandi called the Sendai Framework. Urging national governments to work with private corporations, UNISDR notes: “There is a great untapped potential for contributions from the private sector and other economic actors to build resilience and disaster risk, citing the relevance of companies’ joint expertise on voluntary standards, resilient building codes and business continuity.

Early warning

Under the framework, early warning systems are fundamental in the mitigation of damage from natural catastrophes. As UNISDR head Mami Mizutori pointed out in May: “Updated early-warn­ing systems to keep pace with the fast increase in extreme weather events over the last 40 years are vital in the struggle to prevent disaster, save lives and reduce disaster losses.” In the last four years more than 1,000 risk management and preparedness plans, including early-warning technology, have been rolled out in countries with high levels of risk.

UNISDR told StrategicRISK that there has been significant progress in Asia on early warning systems, particularly for tsunamis, that include evacuation drills in school and other public buildings. Also, the authorities in the Philippines have installed early warnings focused on storm surges and cyclones among other events. “Significant work is underway regarding early warning and early action related to drought including intervention through social protection and insurances,” the UNISDR explains.

The effectiveness of these early warning systems will be put to the test in the coming and future cyclone seasons.