The Cost of Disasters Over Time

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Aon Benfield, which specializes in statistical analysis for the reinsurance industry, recently published its catastrophe report for the first half of 2016.  The report shows that, through June, natural disasters caused $98 billion in damage – about average for the last ten years.

Aon Report CoverSee:

Global Catastrophe Recap: First Half of 2016
June 2016 Global Catastrophe Recap
May 2016 Global Catastrophe Recap

It’s an interesting report, but there are at least two factors that need to be taken into consideration:

The cost of disasters over time

  1. Inflation should result in the cost of equivalent damage increasing year over year.  If inflation were 2% a year, then in a ten-year span, the cost of the identical damage would increase by 22% (good old compound interest).
  2. Physical structures and infrastructure become more complicated and more expensive every 265px-Edificio_Fuller_(Flatiron)_en_2010_desde_el_Empire_State_crop_boxinyear.  Looking at an extreme, to emphasize the change, when the Flatiron Building (175 Fifth Avenue, New York City) was completed in 1902, it was a pretty basic building with only heating, plumbing, electricity and phone service (and I’m not sure how extensive the phone service was).

Today, the equivalent building would have an extensive computer-controlled HVAC system for not only heating, but also cooling and an overall balancing of the air flow throughout the building.

It would have extensive computer networking with, most likely, extensive server and router support over and above simple telephone service.

It would have video security (most likely telemetered to some offsite monitor).

It would likely have active mechanical damping to compensate for wind-driven building motion.

There are many other systems that go into making a modern building a machine, but the bottom line is that a building today is a much more complicated and expensive structure than it was 110 years ago.

 

Population density

  1. Over the past 100 or so years, there has been a migration from the agricultural hinterlands to the cities, concentrating people in ever-higher-density areas.  That trend has increased in the last couple of decades.  I remember when a city with six million inhabitants was (in today’s vernacular) “ginormous” but today there are numerous cities with double and triple that population.
  2. Many of these vast cities are located on the shores of oceans or seas.  Such locations are at an inherent risk of hurricanes and typhoons.  Similarly, since oceans and the edges of tectonic plates frequently coincide, those same locations are at risk of both earthquakes and tsunamis.

Combine increasing density with the inherent risks associated with coastal cities and you have the potential for each natural disaster to cause much more damage and far more injuries.

Therefore, it’s actually a positive trend that the cumulative costs of natural disasters over the years is fairly flat.  That’s the good news.  The bad news, the news that companies and other organizations should be concerned about is that only about a third of those costs is covered by insurance.  Does your company or organization have plans to mitigate the damage a natural disaster can inflict and does your company or organization have adequate insurance to cover that damage?  Covering thirty percent of the damage is almost certainly inadequate.

Make sure that you have predicted your vulnerabilities, planned for them and are prepared to perform when they strike.

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