Thursday, May 16, 2013

The Cost of Disasters

The cost of disasters worldwide and on a national level are rising.  A new UN report released on May 15 puts the cost of natural disasters at $2.5 trillion so far for this century.  The study was conducted by the UN International Strategy for Disaster Risk Reduction.  The study focuses on businesses and their failure to take adequate catastrophe-proofing precautions.  Interestingly, one of the comments relates to insurance and states that insurers only cover a segment of the risk.  In emerging markets, insurance coverage may be less than 10% of the risk compared to insurance coverage of 90% in the US for businesses.  Global companies need to consider the possibility of natural disasters when considering facilities in emerging markets and to look at more than the political and market risks, currency fluctuations, or litigation.

These are very interesting comments.  Clearly, insurance does not cover everything (even all-risk policies have exclusions).  Financial reporting is now forcing companies to consider climate change issues and may soon require consideration of the risk of natural disasters to assets in areas prone to natural disasters.  Something for all businesses to consider when locating plants, offices, distribution centers, and other facilities.

In New York, the cost of Superstorm Sandy is being mitigated by a home buyout plan.  but recent reports indicate that the buyout plan is going to be much smaller than originally proposed.  This means that a repeat of Sandy for those who stay and rebuild is possible.  This raises the cost of disasters on insurers and the government and precludes the lofty goal of reshaping the shoreline to avoid clean-up costs.  Buyouts and returning shoreline to nature in concept is an interesting and less costly option than rebuilding and suffering another disaster.  But in developed shoreline communities, it is difficult to convince landowners to accept a buyout and move to higher ground.  One expert commented that this is a new program and it has to start slowly and hopefully build momentum for future buyouts.

We welcome your comments.

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