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Economics of Natural Disasters and Climate Change

Macroeconomic Aspects and Structural Effects

Master's Thesis 2012 103 Pages

Economics - Macro-economics, general

Excerpt

Table of Content

List of Figures

List of Tables

Acronyms

1. INTRODUCTION
1.1. Problem Investigation and objectives
1.2. Approach
1.3. Definitions

2. SCOPE AND COSTS OF NATURAL DISASTERS
2.1. Reasons for Climate Change
2.2. Appearance of Natural Disasters
2.3. Costs of Natural Disasters
2.4. Disaster Hedging with Cat Bonds
2.4.1. Development of Disaster Bonds
2.4.2. Application of Cat Bonds
2.4.3. Cat Bonds versus Reinsurance

3. ECONOMICS OF NATURAL DISASTERS
3.1. Natural Disasters in a Neoclassical Economy
3.2. Natural Disasters and Poverty Traps - Multiple Equilibria Models
3.3. Macroeconomic Impacts of Natural Disasters
3.3.1. Theoretical Negative Macroeconomic Impacts
3.3.2. Theoretically Conceivable Positive Macroeconomic Impacts
3.3.3. Weakness of the GDP Concept
3.4 Evaluation of the Empirical Studies on the Macroeconomic Impacts by Natural Disasters
3.4.1. Long-Term Negative Macroeconomic Effects of Natural Disasters
3.4.2. Long-Term Positive Macroeconomic Effects of Natural Disasters
3.4.3. Short-to Medium-Term Effects of Natural Disasters
3.4.4. Alternative Methods for Determining the Effects
3.5 Influencing Factors on the Vulnerability of Countries due to Natural Disasters

4. GREEN GROWTH
4.1 Background and Definition
4.2 Roles of Green Growth Application in Disaster Risk Management and Climate Change Adaptation and Mitigation
4.3 Trends of Increasing Vulnerability and Natural Disaster Risk in the Context of Socio-Economic Development
4.4 The Path of Climate Change and Green Growth
4.5 The Macroeconomics of Green Growth
4.5.1 Valuing the Welfare of Future-Generations
4.5.2 Aggregate Supply and Demand Analysis
4.5.3 Financing Developing Countries Green Economies

5. CASE STUDY

6. CONCLUSION

Bibliography

Appendix

List of Figures

Figure 2.1.1: Global mean-temperature 1856-2005

Figure 2.1.2: Records of changes in the atmospheric composition over the past 1000 years

Figure 2.2.1: Number of Natural Disasters from 1950-2005

Figure 2.2.2: Number of Natural Disasters divided by Regions from 1950-2005

Figure 2.3.1: Estimated damage (USD billion) caused by reported natural disasters 1975 - 2010

Figure 2.3.2: World’s costliest natural disasters since 1965 in billion USD

Figure 2.3.3: Insured losses from catastrophes

Figure 2.4.1: Outstanding Cat Bonds until 28th February 2006

Figure 2.4.2: Securitized risks through cat bonds from 1996 - 2004

Figure 3.1.1: A Natural disaster as a shock to the capital stock in a neoclassical economy

Figure 3.1.2: The dynamic effects of a natural disaster in a neoclassical economy (basic model)

Figure 3.1.3: Disaster effects in a small, open neoclassical economy

Figure 3.2.1: The potentially permanent effects of a disaster in a neoclassical economy with multiple steady state (poverty traps)

Figure 5.1: Seasonally adjusted annual rates in per cent - Japan

List of Tables

Table 1.3.1: Link between the Economics of Natural Disasters and Climate Change

Table 2.3.1: Regional distribution of the insured losses in 2005

Table 2.4.1: Scaled loss share by Cat Bonds

Table 5.1: OECD’s revised projections for Japan 2011 - 2012

Acronyms

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1. INTRODUCTION

1.1. Problem Investigation and Objectives

During past centuries, natural disasters occurred more often in our environment and caused more serious damage worldwide. The Hurricane Irene in the Caribbean and the USA, the floods in Australia, the earthquake in New Zealand and especially in Japan in 2011 had enormous extends concerning the caused loss and damages in the specific regions. Within the past four decades, the frequency of large natural disasters raised three times more. Furthermore, the economic losses - after adjusting for inflation - increased even eight times more compared to the past decades. This also has a great impact on the insurance industry, since the insured losses increase even in a larger amount compared to other factors affected by natural disasters. However, the insurance industry uses in spite of these unfavorable loss trends, a wide range of coverage against disasters such as Cat Bonds to transfer the disaster risk, and to avoid unnecessary expenses.

Climate change also plays a big role in the frequently occurring amount of disasters. Since it is still hard to estimate the impacts of future climate changes for the frequency and intensity of natural disasters with its huge losses, new policies such as Green Growth have been introduced for mitigation effects.

1.2. Approach

The purpose of this thesis is to represent and describe the economics of natural disasters due to climate change with its macroeconomic aspects and structural effects. While demonstrating the impacts on natural disasters to a region’s economy, it is important to know that many other factors are linked with natural disasters that have an effect on a region’s economy. Therefore, after defining the important terms in the first section of this thesis, the scope and costs of natural disasters will be illustrated in chapter 2 for a better demonstration of the disaster events impacts in general. This will start by describing the reasons for climate change to demonstrate in the latter the increasing number of disaster appearances due to the effects of climate change.

Different regions will be considered within this analysis, whereas in the following sections only the regions which are economically vulnerable to natural disasters will be taken into account to illustrate the costs of natural disasters.

The insurance perspective will be also included in this analysis within the section 2.3, since the insurance industry has to bear most of the costs resulting from disaster damages in vulnerable regions. However, after showing the enormous amount of disaster costs, the point 2.4 will describe the possibilities and advantages of disaster hedging by Cat Bonds.

In chapter 3 the economics of natural disasters will be described in detail and furthermore macroeconomic models will be demonstrated to concentrate deeper on the macroeconomic aspects of natural disasters. This chapter will begin with the illustration of Natural Disasters in a Neoclassical Economy 3.1 by models and will go on with the effects poverty traps in a region due to shocks by natural disasters that may shift an economy’s steady state. Furthermore the macroeconomic impacts will be discussed within 3.3 by considering the theoretical positive and negative macroeconomic impacts of disasters taking the weakness of the GDP concept into account. This chapter will be completed by considering as a last macroeconomic impact the influencing factors on the vulnerability of countries due to natural disasters to distinguish, which factors affect the amount of direct and indirect losses within a certain economy.

After discussing and showing the impacts of natural disasters due to climate change in an economy, new policies that could mitigate these negative effects of disasters will be introduced in the chapter 4 as Green Growth. This will begin by displaying the history and definition of Green Growth to have an idea how such new policies started, and will go on with the role of Green Growth in our environment for the future. The trends of increasing vulnerability and the risk of natural disasters will be addressed in 4.3 to show the importance of such new policies for the future, responding in the latter section 4.4 to the path of climate change and green growth. Furthermore, this chapter will be closed by considering the Macroeconomics of Green Growth in 4.5 involving the discussions about the welfare of future generations, supply and demand analysis and financing developing countries green economy policies.

Last but not least a short Case Study about Japan’s economic forecasts and impacts after the earthquake and tsunami disaster in 2011 will be illustrated in chapter 5, closing with a final conclusion about the economics of natural disasters due to climate change.

1.3. Definitions

The area of Natural Disasters and Climate Change owns a multidisciplinary research and policy analysis. Therefore it is necessary to state the use of specific terms and concepts of Natural Disasters and Climate Change at the beginning of this thesis, which covers the aspects of both, an economy wide and macroeconomic phenomenon. Basic terms in the language of disaster research and practice seem to be common in certain fields, but in fact they often reflect subtle distinctions in natural-, and social-scientists as well as practitioners approach. Therefore, it is not possible to adopt a widely accepted definition of the key concepts, such as hazards, disaster, vulnerability, risk, etc. as there is no agreed standard usage in the literature.

Climate change defines any long-term shifts in the statistics of the weather and climate elements, such as temperature or winds.1This can appear due to natural external forcing’s e.g. solar emission or slow changes in the earth’s orbital elements, but it can also be caused by human activities for instance through the emission of greenhouse gases in the atmosphere which can lead to a rise of the average temperature per year.2The term Climate Change is often used in a more restricted sense, to denote a significant change of important economic, environmental and social effects, caused by the change of a metrological element’s mean value in a certain period of time.3These changes in heat, rainfall patterns or the rise of the sea level can lead to increased occurrence of natural disasters.4This paper will focus on the impacts of climate change as natural disasters, which affect a countries economy in a greater extent.

Anatural hazardis a geophysical, atmospheric, or hydrological event that has potential for causing a harm or loss.5In the perspective of the range of natural phenomena for instance rainfall, tropical storms, flooding, earthquake or tsunami, these events are uncommon and extreme.

Accordingly the termriskhas to be determined, which is a combination of the probability, or frequency, of occurrence of a defined hazard and the magnitude of the consequences of the occurrence.6Furthermore it is useful to distinguish hydro-meteorological hazards (atmospheric or climatic hazards and coastal hydrological hazards) from geophysical hazards due to the differences in the involved risk.7

A Natural Disaster is the effect of an abnormal or infrequent natural hazard that affects vulnerable communities and geographic areas. Natural disasters can cause substantial damage, disruption, and casualties, so the affected communities may be unable to function normally and also affect a countries economic situation.8The resulting loss depends on the vulnerability of the affected population to resist the hazard, so a natural hazard will never result in a natural disaster in areas without vulnerability, e.g. strong earthquakes in uninhabited areas.9Therefore Natural Disasters in populated areas such as in developed and developing countries will be considered in this thesis. According to United Nations International Strategy for Disaster Reduction (UNISDR) the definition for Natural Disasters is as follows:

A Natural Disaster is a serious disruption of the functioning of a community ora society causing widespread human, material, economic or environmental losses which exceed the ability of the affected community or society to cope using its own resources10

As the interruption of a community from a natural disaster can lead to some combination of losses, these can also imply a reduction in the economic activity of a region, such as income generation, investment, consumption, production, and employment in the real economy.

Therefore, the Economics of Natural Disasters can be defined as a natural event that causes a perturbation to the functioning of the economic system, with a significant negative impact on assets, production factors, output, employment, or consumption.11

The potential to suffer from a harm or loss depends on the magnitude of the natural disaster and a regions or community’s vulnerability towards a disaster. The deviation of economic aggregates from expected economic trends, without taking the effects of a natural disaster into account, reflects the sensitivity of an economy to a disaster shock, as the economic activity is sensitive to many influences.12The recovery of the economic activities within a certain time frame, which involves the repair and replacement costs, demonstrates the resilience of an economic region by managing the effects of a disaster without compromising the envisioned long-term plans.13

The table below summarizes the links between the definitions concerning the Economics of Natural Disasters and Climate Change, and also illustrates the approach of this thesis for the upcoming chapters.

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Table 1.3.1: Link between the Economics of Natural Disasters and Climate Change14

The above illustrated concept can be used any level of analysis from the infrastructure to economies.15

2. SCOPE AND COSTS OF NATURAL DISASTERS

Within this chapter the reasons for climate change, appearance of natural disasters including statistical data as well as the costs of natural disasters with its insurance and reinsurance costs and disaster hedging due to increasing number of natural catastrophes will be demonstrated and discussed. The analysis and discussion will include the facts of developing and developed countries, since as mentioned before there would not be a hazard where there is no vulnerability in a region or area.

2.1 Reasons for Climate Change

A number of observations provide insight about the Earth’s rapid Climate Change. Around the middle of the 19th century, a wide spread direct measurement of the surface temperature started. For about a hundred years, near global observations of other surface “weather” variables, such as winds have been made. The Sea level has been measured in some places for more than a hundred years, but it provides limited global coverage of the measurements. Since the mid 19th century, the surface of oceanic observations was recorded from ships. From the late 1940’s on, upper air observations have been made systematically. The numbers for sub-surface oceanic temperature with almost a global coverage are now available from the 1940s. Other data from Earth-observation satellites have been used to provide a wide range of global observations of different components of the climate system since the late 1970s. Additionally another set of data that come from the growth of trees, corals, ice, etc. are also giving information about the Earth’s climate of centuries.16

The Figure 2.1.1 on the next page shows the combined annual land-surface air and sea surface temperature anomalies (°C) of the years 1861 - 2000, relative to the years 1961 - 2005.

Global mean- temperature from 1856 - 2005

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Figure 2.1.1: Global mean-temperature 1856-200517

As illustrated in the Figure above, the global average surface temperature has increased by 0.6 ± 0.2 °C³ since the late 19th century. The year 1998 was outstanding recorded as the warmest year. However, the years from 2001 - 2005 were compared to the decades before the warmest years since 1856. Most of the increases in global temperature have occurred in two distinct periods. These were in the years 1910 - 1945 and from 1976 on. The rate of the temperature increase for these two periods is about 0.15°C per decade. It is also proved, that recent warming has been greater over land compared to oceans. Nevertheless due to the increased heat content of the ocean, the global average of sea level has raised.18

Observations in the past have also recorded the changes that have occurred in sources which can lead to climate change. The increases in the atmospheric concentrations of greenhouse gases and aerosols as well as variations in solar activity are the most notable reasons that can alter the Earth’s radiation budget and hence change its climate.19As the data of measurements that was recorded for climate change of the past years, the data sets of the reasonable sources that lead to such changes vary in length and quality of the past decades. Records of solar irradiance exist for only about two decades. Around the middle of the 20th century a sustainable direct monitoring of the atmospheric concentrations of CO2 started, whereas in the later years measurements for other gases such as methane has began. The human influence on atmospheric concentrations of both the longer existing greenhouse gases and the forcing sources for climate change (that exist since the last part of past the millennium) have been also collected in data sets.20In these data the increasing levels of aerosols which have a cooling effect to the atmosphere and the measured heat increase of the oceans were considered. But the calculated warming effects of the greenhouse gasses that were collected from these data explain clearly the observed rise in the global temperature.21So, it is proved that doubling the concentration of CO2 in the atmosphere leads to significant changes in the surface of the global temperature.

The Figure 2.1.2 on the next page shows the increase over the Industrial Era in the anthropogenic emissions of greenhouse gases and sulphur dioxide. For several thousand years, the CO2 concentration was relatively stable. There is a significant rise in CO2 values that began to increase in the 20th century with the industrialization. The concentration of CO2 in the atmosphere has added up from 280 ppm in the year 1970 to 367 ppm in 1999 that makes an increase of 31% in CO2 values. The average rate of increase of CO2 since the 80’s is 0.4% per year. Such an increase during the Industrial Era can also lead to the increase in the appearance of Natural Disasters that will be discussed in the latter section..

The reasons for the greater values of CO2 concentrations come from the oxidation of organic carbon by fossil-fuel burning and deforestation.

Furthermore, during the past decades, the growth of CO2 emissions are besides the fossilfuel burning mainly due to changes in the land-use that makes up to 10-30% of the emissions and especially from deforestation of e.g. the Amazon Rainforest or the conversion of other forestlands to farms, ranches or urban use by humans22.

The most dominant human-influenced greenhouse gas is as shown in the Figure 2.1.2 the CO2 with a radiative forcing of 1.46 Wm ². That makes in total 60% from the changes on concentrations of all the globally mixed greenhouse gases ever. The rates for the atmospheric CO2 increase from year to year were high over the past 40 years. These changes lead statistically to short-term climate variability.

Atmospheric concentrations of CO2, CH4 and N2O

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Figure 2.1.2: Records of changes in the atmospheric composition over the past 1000 years.23

That alters the rate at which atmospheric CO2 is taken up and released by land and the oceans. In the strong El Niño years, highest rates of increase in the atmospheric CO2 rates were observed. The explanation for the increase of these higher rates comes from a reduced terrestrial uptake of CO2 during the El Niño years and the grand CO2 take up of the ocean that was more than usual during those years.24

The atmospheric methane (CH4), which is a greenhouse gas with both natural (e.g. wetlands) and human influenced sources (e.g. agriculture, natural gas activities, and landfills), show also an increase in the atmospheric concentration by 150% since the year 1750. CH4 is removed from the atmosphere by chemical reactions whereas more than half of the CH4 emissions come currently from human activities.25However the increase was highly irregular during the 90’s, where there is no clear quantitative explanation for it. The quantification of some anthropogenic sources of CH4, as from rice production, shows also an improvement since the Second Assessment Report (SAR).26

Another greenhouse gas is the Nitrous Oxide with both natural and anthropogenic sources. During the Industrial Era the concentration of nitrous oxide (N2O) has steadily increased in the atmosphere by 16% since 1970. Between the years 1980 and 1998 there was an increase by 0.25% per year of N2O rates in the atmosphere. Nevertheless a decrease in the use of nitrogen-based fertilizer, lower biogenic emissions, and larger stratospheric losses due to volcanic induced circulation changes can lead to significant decrease of N2O concentration in the atmosphere.27

In general, the average global temperature as the main climatic element shows a continuous increase through the enrichment of emissions, such as CO2, CH4, N2O, etc. in the atmosphere. So the greenhouse-effect was formed through these increases of the global average temperature. By the warming of the atmosphere from -18°C to an average global temperature of +15°C a basis of diverse biological life could be formed on the earth, which is generated through natural elements but also through anthropologist influences. The carbon-cycle caused a natural increase in the global temperature over thousands of years and thus a wide range of biological life could be formed.28

In contrast the anthropological greenhouse effect, caused by industrial emissions, energy- sector, intensive agriculture, factory farms as well as by the destruction of the tropical rain forest or the damage of the oceans, leads to a disruption in the climate system and hence to natural disasters.29

The appearance of natural disasters due to climate change and other factors will be discussed in the following chapter.

2.2 Appearance of Natural Disasters

Natural disasters are a global issue as they occur all over the world. The frequency of natural catastrophes increased worldwide drastically in the last decades. This is also confirmed through the Munich Re Group, which elevates for about 30 years continuously a statistical analysis with an extensive data of losses.30

Worldwide between 20 and 50 elementary events are measured monthly, while only a few of these natural events are considered as great natural disasters. Such natural events are considered as disasters if only the affected region is not able to help its self for rehabilitation and when to a larger extend the national and international help is required. Generally, this is the case when the number of the dead goes up to hundreds and thousands of people and when over ten-thousand people become homeless, whereas the economic total loss range around 100 Million USD.31

The graph below shows the number of Natural Disasters which were recorded from the Munich Re Group by disasters and by the caused damage to a greater extend from the years 1950 to 2005.

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Figure 2.2.1: Number of Natural Disasters from 1950-200532

increased drastically during the past decades. During the 50’s the average of recorded Natural Disasters were two per year. Compared to that, the average of Natural Disasters increased to nine per year during the 90’s that makes an increase by 450% within five decades. In 1994 an amount of 15 Natural Disasters were recorded within one year, this reaches the peak of all recorded disasters until 2004. Especially the increased number of floods leads to this outcome. If one considers the amount of the occurrences, then it is clearly to gather from the Figure 2.2.1 that the numbers of storms during the past five decades were the highest.

Considering the major disasters that already have a complete report from the former years, it can be told that the total number of disasters in the 60’s was fourteen whereas in the 80’s there were 70 disasters recorded. A major increase of more than 500% is clearly to see within these three decades.

Figure 2.2.2: Number of Natural Disasters divided by Regions from 1950-200533

It is also important to contemplate in which regions such disasters occur to analyze in the latter the effects on the region’s economy. The Figure 2.2.2 shows the number of natural disasters divided by regions and the type of the disaster. The number of storms that appear in North America outranges with a large number the natural disasters in other regions.

Within 55 years from 1950 to 2005 the number of heavy storms that were recorded as natural disasters were 25 in North America. This points out that in general every second year there is a storm in North America that affects the economy to a greater extend as a natural disaster. Heavy storms also appear in other regions as in Europe, Asia, Oceania, Central America, whereas such heavy storms are seen as one of the effects of the global warming due to greenhouse gases.34In Europe the number of heavy storms within the 55 years was ten, which means that almost every sixth year there is a heavy storm in Europe. Counting the number of heavy storms that were contemplated as natural disasters between 1950 and 2005 together, it can be told that there were in total 58 storms compared to 35 earthquakes in total that appear as the second most common type of natural disasters on earth. Earthquakes to a greater extend happen most frequently in Asia where the number of such a natural disaster reached between those 55 years eleven. So every fifth year there is an earth quake in Asia which has a great impact to the affected region’s economic loss.35

Concerning the Figure 2.2.2, in Europe and in South America there is an earth quake each tenth year on average. Whereas the most affected region by an earth quake in Europe is generally Far East Europe. The highest concentrations of flooding due to heavy rainfalls share the regions Europe and Asia. Under the section others are listed such natural disasters as heavy snow falls in Europe for example, or droughts in Africa.

According to the registered natural disasters which occurred between 1950 and 2005, 26% of the total number took place in North America. An amount of 30 natural disasters within these 55 years were recorded for this region, especially due to heavy storms. The regions Asia and Europe experienced on average 25 natural disasters within 55 years that makes 22% for each region of all disasters that occurred during that time. The difference lies between the types of disasters within these two regions, as in Asia earthquakes were the most common type of disasters that occurred within those years and Europe was mostly occupied by heavy storms. Central America and Oceania belong also to those regions that are frequently visited by storms.36

As shown in the Figure 2.2.1 the number of natural disasters has increased drastically. One also has to consider that especially the increase of the earth’s temperature via greenhouse gases leads to an increase of the water temperature in the sea’s, whereas this again leads to the appearance of tropical storms such as hurricanes as discussed in the previous section regarding the climate change.

The appearance of natural disasters has a considerable economic impact on the affected region, which was already shown by the Group Munich Re within their statistical analysis of the caused damages. Therefore, in the next chapter the costs of natural disasters including the insured losses will be discussed and elaborated.

2.3 Costs of Natural Disasters

As outlined in the sections before, the increased number of natural disasters has a great impact to the economy due to the caused costs. In the second half of the 20th century a number of 235 great natural disasters were recorded by the Munich Re group with a total economic loss of around 1.000 billion USD. With the increased appearance of natural disasters, the amount of the average economic total loss within the same time frame also increased drastically from 3.7 Billion USD to 11.4 Billion USD per year.37Factors that lead to such trends are mainly the following reasons:

- The increasing number of the world’s population and wealth;
- The concentration of people in certain areas including the assets and economic activity (urbanization);
- The expansion of cities onto marginal lands with higher disaster risk;
- Anthropogenic change of the environment;
- Better historical and statistical coverage of disaster situations.38

However, the rising trend concerning the losses is primarily to be attributed to the growth of world population as well as to the increased concentration of people and economic values in large cities or metropolis regions. Between 1950 and 2003, the world’s population grew according to the U.S. Census Bureau from an estimate of 2.5 billion to 6.3 billion people. This also reflects that nowadays more people are affected by natural disasters in the world due to the increasing world population.39

Furthermore, people are migrating worldwide into such coastal regions that are generally exposed to natural disasters due to hurricanes or tornados. Additionally, the industries are also moving into vulnerable regions by natural disasters near the seas for example, as the industries are also following the population, or they are taking other things such as the distribution channels, storage facilities or transportation into account. The spectrum of the examples reaches here from the hotel concentrations at hurricane-threatened beaches as in Florida or the Caribbean over to the offshore-industry in the stormy North Sea or in the arctic ice up to nuclear power plants in extremely endangered earthquake climate zones as in Japan.40The earthquake and tsunami in Japan bearing the highest disaster costs to date is a good example that threats one day occur. Nowadays natural disasters are getting more expensive, due to the fact that more people are building more expensive infrastructure in areas that are prone to natural disasters.41This highlights certainly that natural disasters are having a greater impact today rather because of human nature’s conduct.

Figure 2.3.1: Estimated damage (USD billion) caused by reported natural disasters 1975 - 2010.

The Figure 2.3.1 presents the estimated costs for the reported natural disasters damage

between the years 1975 - 2010 shown by the columns. Within 20 years from 1990 on, the costs of natural disasters due to the caused damage increased extremely compared to the decades before. The highest damage within those years had to suffer the region Gulf of Mexico, especially the state Louisiana in the USA when Hurricane Katrina occurred in 2005. The damage for this event has cost around 105 billion USD for repairs and reconstruction in the region, making it the costliest natural disaster in US history.42The estimated damage in total for the year 2005 involving other natural disasters and Hurricane Katrina were around 220 billion USD. Hurricane Ike in the USA and Caribbean and also the Wenchuan earthquake in China were the main events that led in 2008 to damage costs of almost 200 billion USD as demonstrated in the Figure 2.3.1 before. The third highest column in the table indicates the year 1995 with estimated costs of 160 billion USD caused by natural disasters. A major role concerning the damage played the Kobe earth quake in Japan with estimated cost of 115 USD billion in damage that was 2.5% of Japan's GDP in 1995.43

In 2010 an economic loss of 109 billion USD was caused by natural disasters with Chile and China bearing most of the costs, that was three times more than in 2009 as the United Nations reported.44However the earthquake and tsunami in Japan in 2011 is estimated with the highest number of economic loss with more than 200 billion USD. The Figure 2.3.2. on the next page shows separately the costliest natural disasters since the year 1965 in the world, given the economic loss as % of GDP in the year of the disasters.

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Figure 2.3.2: World’s costliest natural disasters since 1965 in billion USD45

The Japan earthquake and tsunami, the New Zealand earthquake, Hurricane Irene all occurred in the same year and made 2011 to the year of the catastrophes. However, the Japan earthquake and tsunami that occurred in March 2011 is seen as the heaviest natural disaster in the history. Entire Places streets, railways were washed away by the floods of the tsunami, more than 16.000 died, and in the nuclear power plant in Fukushima it resulted as the ultimate worst case scenario. The cost of the nuclear-disaster excluded, the economic damage caused by the earthquake and tsunami in Japan were estimated with costs more than 210 billion USD for the year 2011.

The macroeconomic costs of the earthquake in Christchurch in New Zealand were around 16 billion USD, where the greatest part was insured with around 13 billion USD as per Munich Re Group.46

Therefore the estimated insurance losses were around 105 billion USD for 2011 according to Munich Re, which specializes in high-risk insurance called reinsurance, making it the costliest year on record in terms of natural disaster losses.47Worldwide the estimated total costs caused by natural disasters were around 380 billion USD for 2011.48As per Munich Re Group the worldwide macroeconomic loss from natural disasters were with the amount of 380 billion USD three times higher than in the record year 2005, when Hurricane Katrina destroyed New Orleans. Especially the earthquakes in Japan and in New Zealand caused two third of the estimated costs via disasters in 2011, whereas usually weather- related natural disasters are the costliest ones.49Another unusual fact is the regional- distribution since 70% of the disasters were recorded in Asia in 2011.The insured losses in this case exceeds with the amount of 105 billion USD the highest level of disaster insurance losses that was recorded in the history with 101 USD due to Hurricane Katrina in 2005.50

Generally it can be told that in the long-term predictions the cost for natural disasters will increase, due to the higher asset values in the affected regions. For example a hail storm was affecting a forest in the past, where nowadays a greenhouse is placed in the location. Furthermore, it is obvious that the increased number of disasters is to be declared with the climate change and there is an increased need to have insurance due to the increased risk of disasters.51

Therefore the ability to have an effective insurance protection is an essential factor to ensure the welfare and growth in an economy.52As the increasing number of disasters (natural and man-made disasters) in the last decade led to new record losses53, the private insurance industry reaches the limit of their capabilities.

Additionally new hazards such as climate change, globalization trends, terrorist threats, etc. with unforeseeable risks also accrue nowadays, which has an enormous damage potential to the society.

Simultaneously the human and material damage per disaster increases with a higher number of catastrophic events due to increasing population density and assets. Since the number of casualties by disasters increased since 197054, the amount of loss also has increased for the insurance companies. The reason for this is the fact that the percentage given the insured value of total assets is higher nowadays then in the past due to the economic development. The Figure 2.3.3 shows the drastic increase in insured disaster losses.

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Figure 2.3.3: Insured losses from catastrophes55

The year 2004 was for the insurance industry an expensive record year, given its 48 billion USD of property damage exposure, primarily because of hurricanes Charley, Frances, Ivan and Jeanne in the United States. In 2005 this record was exceeded by far as mentioned before because of the Hurricane Katrina. The property-insurer posted a worldwide catastrophic loss of 83 billion USD, which represents a new dimension for the year 2005.56This increase came primarily from natural disasters. However the earthquake and tsunami in Japan beat this with its caused insurance costs as well.

While the natural disaster losses were about 3 billion USD per year for the insurance industry during the 1970’s, they rose in the period 1987-2003 to 16 billion USD. In the years 2004 and 2005, it jumped to a high of 45 and 78 billion USD. This increase is primarily due to the caused floods by storm damage (including the hurricanes Katrina, Ria and Wilma) in North America and in Switzerland and Germany.57

As in the previous years, the insured losses are concentrated in the industrialized countries, since these have a higher concentration of value and a higher insurance density. Table 2.3.1 shows the geographic distribution of insured losses in the year 2005.58

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Table 2.3.1: Regional distribution of the insured losses in 2005

A striking fact is that only 13.6% of the catastrophic events are taking place in North America in the year 2005, whereas compared to the fact the associated damage portion was 87.1%. The number of disasters in Asia was almost four times higher with 208 where more than 89.000 people were affected from the disaster in that region. The insured losses in Asia were with 2.660 million USD only 3.2% quite less compared to North America. The high insurance losses, especially in North America, and the high number of casualties in Asia are resulting mainly from the exposure of the affected areas to earthquakes, storms or floods. Constructional arrangements against natural disasters in these areas are lacking. In Table 2.3.1 only the insured losses are recorded. The economic losses exceeded the insured losses even many times more, as already shown in the Figure 2.3.2 given the costliest disasters seperately.

If this trend of mega-damage events due to natural disasters will keep on continuing, then it is foreseeable that insurance losses may occur due to natural disasters in the order of 100 billion USD for the future.

Following reasons are significant for the rising number of natural disasters which leads to human and material insurance of damage:

- The global population has grown with increasing urbanizatio059n trends. The world’s population has grown from 2.5 billion in 1950 to over 6.2 billion in the year 2000, it has more than doubled. The proportion of urban population was 30% in 1950 and rose to 50% in 2000.59
- Highly exposed areas are being used more often. There is a current trend of moving into the climatically comfortable regions of Florida and California, even though these states are danger threatened especially from hurricanes or earthquakes. This danger is consciously displaced from the local people, or the real estates are purchased at a lower cost.60
- There is an increasing concentration of values at high insurance density.61
- The climate is changing due to global warming, which leads to more natural disasters.62

Referring to the Figure 2.2.1 the statistics show that catastrophic events occur more frequently within the past centuries. Therefore the insured losses per event have greater proportions. As disaster events with billions of insured losses increasingly poses the issue, whether the insurance industry is still able to absorb potential huge disasters or not, there is an opportunity for people to hedge against the consequences of these events. So the insurance coverage is seen as an important production factor and therefore the insurance industry should be considered as a key sector in the economy.63

In an economic input-output analysis, it has been found that the output-multiplicator is significantly higher in the insurance industry with 2.0316 than the multiplicator of other economic sectors with a 1.6355, wherein this increase comes from the rising demand for insurances with an amount of 1000€.64 Generally, as welfare-enhancing effects are associated with insurances, the risk expenses can be spread between the potential parties through insurance contracts. Therefore more people are willing to invest for risky but nevertheless productive economic activities, as they do not want to risk to be without any insurance instead.65Thus insurances enable more productive use of resources by allowing them to diversify the risks.66The insurance coverage will not cause a reduction of existing risks, but it increases with the risk tolerance of individuals.67It is argued, that the willingness to take on more risks by people, leads to an increased level of production and thus to a higher GDP.68

The previous sections illustrated, that catastrophic events such as natural disasters led in the recent years to higher insurance costs of billions USD. While hurricane Andrew was considered as the worst case scenario in the beginning of the nineties due to the caused insured losses with about 22 billion USD, this record was exceeded by far when hurricane Katrina hit the US coast in 2005 and caused insured losses of more than 45 billion USD which is more than twice as much as hurricane Andrew has caused on insured losses.69

[...]


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32Cf. BERZ (2001): Naturkatastrophen im 21. Jahrhundert - Trends und Schadenpotentiale , P. 10

As seen in the Figure 2.2.1 the number of Natural Disasters with a greater vulnerability

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50Cf. HAMBURGER ABENDBLATT (2012): Rekordsumme: Erdbebenschäden sind teuer wie nie zuvor

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63 Cf. THOMAS/SCHULENBURG/ LOHSE (2005): Der volkwirtschaftliche Wert der Versicherung, P. 178 21

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67Cf. THOMAS/SCHULENBURG/ LOHSE (2005): Der volkwirtschaftliche Wert der Versicherung, P. 158

68Cf. NGUYEN (2007): Grenzen der Versicherbarkeit von Katastrophenrisiken, P. 13

69Cf. NGUYEN (2007): Grenzen der Versicherbarkeit von Katastrophenrisiken, P.13

Details

Pages
103
Year
2012
ISBN (eBook)
9783656363569
ISBN (Book)
9783656363941
File size
1.7 MB
Language
English
Catalog Number
v208936
Institution / College
University of Wuppertal – Schumpeter School of Business and economics
Grade
1,3
Tags
economics natural disasters climate change macroeconomic aspects structural effects

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Title: Economics of Natural Disasters and Climate Change