Coming Soon To A City Near You - $320 Billion In Economic Losses

First launched in 2015, an update to the Lloyd’s City Risk Index, a collaborative effort with the Centre for Risk Studies at Cambridge University, acknowledges that we are firmly in the era of man-made risk (a handy survival guide is available). The so-called Anthropocene, a new geologic age that began circa 1950 with the rise of urbanization and mega cities would correspondingly tilt the scale of global risks away from natural perils. When it comes to responding to natural hazards, notwithstanding perilous rates of underinsurance and the protection gap, the capital markets have responded affirmatively with a range of innovations, such as insurance, catastrophe bonds and other instruments. The challenge, as reflected in the Index, is that man-made risks, such as market crash, cyber threats and political risk, among others, now account for 60% of the total economic output at risk (GDP@risk) in the world’s major cities, which in turn correspond to nearly half of the world’s GDP. On average, the word’s cities can expect to lose $320 billion a year of their economic productivity, not counting the costs of extreme scenarios. The human toll of this emerging reality is inestimable and unfairly arrayed against poor and marginalized communities.

Another way to view the findings in the City Risk Index is that 2017, which was an annus horribilisfor the world and many of the cities in the Index such as Houston, can now be considered an average year. The convergence of man-made, natural and emerging threats is having dangerous consequences and not all of them are of the “smoking crater” variety. Underinvesting in resilient infrastructure, for example, is a “slow-boil” attritional threat with equally consequential impacts. Oklahoma City is now a major earthquake epicenter and the frequent site of earthquake swarms due to fracking activity. Surely, Oklahoma’s building code did not anticipate this peril as a part of its resiliency standards, any more than the engineers of the Oroville dam in California factored rain bombs. Similarly, the confluence of extreme natural hazards, along with other anthropogenic impacts, such as hazardous waste sites and pollution, are on a collision course. In 2016, Los Angeles, one of the top-ranking cities in terms of GDP@Risk in the Index, saw noxious fumesthreatening air quality in the city. The 2011 Fukushima trifecta of an earthquake, tsunami and nuclear waste hazards perhaps best embodies the need for equilibrium between man-made and natural risks - recalling that natural hazards do not plot or plan, but man-made risks have agency. Indeed, micro-climate impacts continue to plague cities around the world, which steadily grind under the weight of commerce and the carbon-heavy economy, while at the same time contending with the pressure of burgeoning populations and their economic aspirations.

While the updated Index cuts the total number of cities that are being tracked, down from the original 301 cities, it adds an extreme loss scenario for the 279 cities tracked in the report. These extreme loss scenarios make for sobering analysis of the types of complex exposures the world faces and the urgency of driving down the insurance protection gap through a mix of public policy, disaster preparedness and, critically, financial and infrastructure innovation. Against this confluence of threats, even “fortress nations” like the U.S., shielded by the world’s most powerful military (increasingly relied on as the first line of defense as opposed to the last) and two oceans, can be brought to their knees. By this measure, the U.S. public and policymakers alike should take little comfort in the fact that 40% of Americans cannot withstand a $400 emergency. The Index underscores the material gains that can be made by pre-investing in resilience, which may very well be the world’s greatest investment opportunity. Indeed, for investors who seek long-range certainty, risk is here to stay and efforts to chip away at known threats enhancing resilience can yield average annual benefits of $73 billion.

Full story available in my column in Forbes.