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Third Copenhagen Consensus: Natural Disasters Assessment, Kunreuther Kerjan

An Assessment Paper on Natural Disasters has been written by Howard Kunreuther and Erwann Michel-Kerjan and will be released for the third Copenhagen Consensus. The working paper used by the Expert Panel is available for download here, the finalized paper has been published in Global Problems, Smart Solutions - Costs and Benefits by Cambridge University Press.

In addition two Perspective Papers have been released, one by Ilan Noy, as well as one by Stéphane Hallegatte.

Short summary

In recent years, the world has experienced a series of truly devastating natural disasters that have taken many lives and triggered unprecedented economic losses. Hurricane Katrina in 2005 in the United States, the 2010 massive floods in Australia and the 2011 earthquake/tsunami in Japan, among other events, have demonstrated that even the most wealth and well prepared countries can experience large-scale damage and destruction when natural disasters strike.

The situation is much worse in low-income countries since they often do not have the financial means to protect their population and economy against catastrophes. In addition, building codes are lacking or not well enforced and the infrastructure is often poorly designed for disseminating information prior to a disaster, and assisting victims in a timely manner after its occurrence. The earthquake in Haiti in 2010 illustrates the challenges of an unprepared and poor country.

Beyond the tragic loss of life, these disasters impose an economic toll – and one that is growing. According to the reinsurer Munich Re, direct economic losses from natural catastrophes amounted to $1.6 trillion between 2001 and 2011. There is also a long-term impact on development potential should the loss from the disaster be very high in relation to the country’s annual Gross Domestic Product as was the case for small island economies such as St. Lucia following Hurricane Gilbert and in Samoa following Cyclones Val and Wasa. In other words, recurrent natural disasters have been a roadblock to growth in impoverished countries.

In the near future, even more people will be living in high risk areas and more assets will be concentrated there. This trend, combined with the expectation of more extreme events from changes in climate patterns, challenges our capacity to adapt to that more dangerous environment. In an innovative paper for the third Copenhagen Consensus, Professors Howard Kunreuther and Erwann Michel-Kerjan from the Wharton School of the University of Pennsylvania propose a series of concrete actions to be undertaken to reduce our vulnerability to such large-scale catastrophes.

They propose investments in four risk reduction measures that will increase resilience around the world. Three proposals are designed to better protect against damage and loss of life from earthquakes, floods, and hurricanes/cyclones respectively, and one is intended to protect communities more generally.

First, the authors propose designing schools that can withstand earthquakes to reduce damage and the number of fatalities to children, teachers and other staff. Retrofitting the schools in all 35 most-exposed countries around the world would save the lives of 250,000 individuals over the next 50 years. Costs obviously vary from country to country: in the Solomon Islands it would cost just $36 million to retrofit schools while the cumulative total benefits are $235 million, yielding a benefit/cost ratio (BCR) greater than 6. In Afghanistan and Myanmar the costs would be $698 million and $1,570 million, respectively, with a benefit of about five times the amount invested.

Kunreuther and Michel-Kerjan’s second proposal would invest in community flood walls and elevated homes to protect areas subject to floods. It would cost $5.2 trillion to elevate by one meter all houses subject to flooding in the 34 countries most susceptible to this hazard and nearly $940 billion to build walls around the affected communities in all 34 countries. The most cost-effective approach would be to invest $75 billion into building flood walls around some of these communities. Kunreuther and Michel-Kerjan calculate the cumulative expected benefits over the next 50 years as $4.5 trillion (BCR of 60). Those benefits from the community wall would mostly come from reduction in damages, though it would also save 20,000 lives.

Thirdly, they propose strengthening the roofs of houses in countries with high exposure to hurricanes and cyclones to reduce losses from wind damage. It would cost $951 billion to undertake this disaster risk reduction measure in the 34 countries most prone to such wind events, with benefits ranging between two and three times this amount. This measure would save 65,700 lives over the next 50 years.

Finally, Kunreuther and Michel-Kerjan explore setting up effective early disaster warning systems to protect civilians from disasters. Based on existing studies and research from Stephane Hallegatte, they find that early warning systems in developing countries would require less than $1 billion a year and would have direct benefits with respect to disaster loss reductions of between $1 and $5.5 billion per year.

Further indirect benefits from the four proposals can be achieved by taking into account the reduction of evacuation costs (from reducing housing damage), lowering the number of injured and possible subsequent health issues, continuity of education (from preserving schools) and relieving social stress to individuals and avoiding business interruption.

Kunreuther and Michel-Kerjan note that the question of who should pay for disaster protection measures is an important one to consider. There is a need to convince international donors to start investing more systematically in disaster risk reduction ex ante rather than focusing almost exclusively on post-disaster assistance, as they do today. Similarly, NGOs must put their time and energy into promoting measures that reduce future losses and fatalities rather than focusing on emergency relief. More governments in developed countries and multinational corporations need to provide funding and technical expertise to assist low-income countries in undertaking these measures.

Kunreuther and Michel-Kerjan emphasize that it is important to recognize that the decision biases that we all have, such as focusing on short-term costs rather than long-term benefits, might cause decision makers to deviate from a pure BCR criterion. To address these issues, they propose new programs such as multi-year insurance coupled with disaster-risk reduction loan programs, as well as alternative risk transfer instruments for covering catastrophic losses that are now being used more broadly around the world.