Days of reckoning

After a year of tragic and costly catastrophes, a new report examines the possibility of a new ‘normal’ in high-impact, low probability events. Deborah Ritchie reports on the latest thinking from Chatham House

Swiss Re estimates that total insured losses for the global insurance industry from both natural catastrophes and man-made disasters reached US$108bn in 2011. This is more than double the figure they calculated in 2010 of US$48bn. Further, claims from natural catastrophes alone reached US$103bn in 2011, compared to only US$43bn the previous year.

In 2011, total economic losses to society (both insured and uninsured) due to disasters reached an estimated US$350bn, compared to US$226bn in 2010. With approximately US$108bn in insured catastrophe losses, 2011 ranks as nearly the most expensive year for the insurance industry according to Swiss Re’s sigma records, second only to 2005 (US$123bn). In terms of catastrophe claims, 2011 ranks as the second costliest year in history for the insurance industry.

A new report from think-thank Chatham House, asks if the frequency of high-impact, low-probability (HILP) events in the last decade signals the emergence of a new ‘normal’ – indeed, the beginning of a crisis trend? Preparing for High-impact, Low-probability Events: Lessons from Eyjafjallajökull argues that governments and businesses remain insufficiently prepared to manage HILP crises and shoulder their economic, social and humanitarian consequences.

“The frequency of ‘high-impact, low-probability’ events in the last decade signals the emergence of a new ‘normal’. Apparent one-off high-profile crises such as 9/11, Hurricane Katrina, the Macondo oil spill and the Japanese earthquake and tsunami were all mega-disasters requiring rapid responses at a global level, marking the beginning of a crisis trend. But lower-profile, persistent events such as flooding, droughts and cyclones have been shown to have equally serious impacts, raising new questions about the way in which we perceive risk and prepare for disruptive events,” reads the report.

These instances include black swan events, as well as those about which we know and yet are un- or under-prepared for. There are also crises such as pandemics which typically unfold over weeks, months or a few years, for which the scope or timing remains unknown.

Globalisation also means the consequences of HILP events spread rapidly across sectors and borders, often with second- or third-order impacts that are hard or impossible to predict. The 2003 SARS outbreak, for example, cost businesses $60bn, about 2% of East Asian GDP. The devastating earthquake of 11 March 2011 had knock-on impacts for global companies such as Toyota and Sony, which were forced to halt production. “In an increasingly connected global economy and society more people are (and will continue to be) affected by shocks, irrespective of whether ‘high-impact events’ are actually becoming more frequent or not,” it continues.

Echoes of The Black Swan: The Impact of the Highly Improbable (2007, Random House) by Nassim Nicholas Taleb, in which the author gives the rise of the internet, the personal computer, World War I, and the September 11 attacks as examples of black swan events, can be found in these lines, with the main idea in Taleb’s book being not so much to attempt to predict black swans, as to build robustness against negative ones that occur and be able to exploit positive ones.

The focus of the Chatham House report is more on the former, their view being that in this our complex risk environment, despite considerable efforts to improve scientific understanding and reform risk management approaches, governments and businesses remain insufficiently prepared to confront HILP crises and effectively manage their economic, social, political and humanitarian consequences: “Current contingency planning often assumes the return of the status quo ante after a crisis. But this approach may be inadequate in a world of complex economic and social risks, especially when combined with slow-motion crises like climate change and water scarcity. Slow-motion crises such as these build over many years, but are likely to result in a higher frequency and greater severity of shocks. Often there are several steps between an event ‘trigger’ and the social consequences that result.”

The think-tank supports the theory that national risk management structures must reconsider contingency measures and crisis decision-making structures. Risk matrices which categorise risks by common consequences that require a generic response (such as earthquakes or floods) and those that require a more specific response (such as pandemics) can provide a more useful framework for decision-making.

However, this approach has its limitations, they warn, as it may not always capture inter-related risks (that flooding could lead to foot and mouth disease, for example). That said, building generic institutional capacity to plan and respond to any type of event will create a broader platform to ensure greater preparedness overall.

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