Economic losses from disasters underestimated, 'out of control' - UN

by Megan Rowling | @meganrowling | Thomson Reuters Foundation
Thursday, 16 May 2013 15:15 GMT

A man watches as water is pumped out of his shop in Pathum Thani province, a suburb of Bangkok, Nov. 29, 2011. REUTERS/Sukree Sukplang

Image Caption and Rights Information
Economic losses from disasters have been underestimated by at least 50 percent, with small businesses often worst-hit, says report

LONDON (Thomson Reuters Foundation) - Economic losses caused by disasters have been underestimated by at least 50 percent, and are "out of control", U.N. Secretary-General Ban Ki-moon has said.

The head of the world body was speaking on Wednesday at the New York launch of a U.N. report on the business case for disaster risk reduction, which reviewed reported losses from disasters in 56 countries.

"Our startling finding is that direct losses from floods, earthquakes and drought have been underestimated by at least 50 percent," said Ban. "So far this century, direct losses from disasters are in the range of $2.5 trillion. This is unacceptable when we have the knowledge to reduce the losses and benefit from the gains."

The study from the United Nations Office for Disaster Risk Reduction (UNISDR) noted that, between 2001 and 2011, global reinsurer Munich Re. reported around $1.68 trillion in losses, and over the same period, EMDAT, the major public global disaster database, reported $1.25 trillion in losses.

But neither provides a complete picture of global disaster losses, as they do not account for uninsured losses from repeated, smaller-scale but extensive disasters, particularly in low and middle-income countries, according to UNISDR.

Ban said that while governments bear responsibility for measures to mitigate disasters, the private sector also has a critical role to play. It accounts for 70 to 85 percent of worldwide investment in new buildings, industry and critical infrastructure, he added.

The UNISDR report argued that the globalisation of the world's economy over the past 40 years has led to rapid increases in disaster risk in all countries, both rich and poor.

"Decades of decentralising and outsourcing production to areas with comparative advantages, such as low labour costs and access to export markets, has enhanced competitiveness. However, because many of these areas are hazard-prone, business exposure has dramatically increased," it said.

Investors have not paid enough attention to this trend, and national and local authorities have downplayed it in their efforts to attract investment.

Ban said markets have placed greater value on short-term returns than on the sustainability and resilience of businesses. But this is now shifting.

"At long last, we are coming to understand that reducing exposure to disaster risk is not a cost but an opportunity to make that investment more attractive in the long-term," he said.

SMALL BUSINESSES SUFFER MOST

The March 2011 earthquake and tsunami in Japan, and the Chao Phraya river floods in Thailand in the same year have focused attention on the growing impact of disasters on business, the report said.

The global nature of supply chains means that a crisis in one place can have consequences much further afield. For example, damage to a microchip maker in Japan resulted in 150,000 fewer Toyota automobiles being manufactured in the United States.

And even if businesses do not experience direct losses, they often suffer indirectly due to impacts on public infrastructure such as power cuts. During the Thai floods, companies were forced to suspend business with a knock-on effect for their workers, many of whose homes had also been flooded.

While large international corporations may be able to bounce back from disasters, thanks to insurance and diversified assets, this is often not the case for small businesses and informal traders, the report said.

They are more likely to be located in hazardous areas and less likely to have invested in protection. "A single disaster may wipe out all or a large part of these businesses’ capital," the report said.

It surveyed 1,300 small and medium-sized businesses in six disaster-prone cities in the Americas, and found that three quarters had suffered business disruptions related to damaged or destroyed power, telecommunications and water utilities. Yet only 14.2 percent of those with fewer than 100 employees had even a basic approach to crisis management in the form of business continuity planning.

The effects of a disaster can also persist for years, the report noted. Before it was hit by an earthquake in 1995, the Japanese port of Kobe was the world’s sixth busiest. Yet, despite massive reconstruction, by 2010 it had fallen to 47th place.

CUTTING COSTS, CREATING VALUE

A new global risk model, developed by UNISDR and its partners, projects annual losses from earthquakes and cyclonic winds alone to be in the range of $180 billion per year this century.

The study also reviewed risk management in 14 major corporations: ABB, ARUP, BG Group, Citigroup, General Electric, HCC Group, HIRCO Group, Hitachi Group, InterContinental Hotels Group, Nestlé, NTT East Corporation, Roche, Shapoorhi Pallonji&Co. Ltd. and Walmart.

"It is clear from our discussions that senior executives are increasingly aware of the vulnerability of their businesses to disasters and are beginning to prioritise the strengthening of their risk management," said Joseph Rizzo, a partner with global consulting firm PwC. "For the private sector, the business case for stronger disaster risk management is clear: it reduces uncertainty and builds confidence, cuts costs and creates value."

This goes for small entrepreneurs too, the report showed. In Mexico, for example, after its southeastern coast was battered by a hurricane in 2002, the municipality of San Felipe teamed up with farmers and fishermen to help protect them from future storms, by relocating their animals further inland and storing fishing equipment in a safe place. This strategy saved each fisherman around $35,000 when Hurricane Wilma hit in 2005.

UNISDR chief, Margareta Wahlström, said a major international conference on disaster risk reduction in Geneva next week would focus on boosting the contribution of business.

"The beginnings of changing attitudes in the private sector now need to transform into a more systematic approach to disaster risk management in partnership with the public sector to make the world a safer place," she said.

Our Standards: The Thomson Reuters Trust Principles.