Conversations / Viewpoint

They do on many fronts. As we saw with the recent Japanese earthquake, key consumer products like cars and IT tools, can be delayed or completely shut down. Also, consumers can see increases in prices for traditional consumer products as well as delays in customary usual services. 

We continue to be amazed at the size and scope of weather related and natural disasters such as the tornadoes in the midwest. We also continue to learn that strong building codes and fully enforced building codes result in less loss of life in property damage. We are also seeing stronger earthquakes and wider reaching wind storm impacts in surprising regions of the world both US and globally, which require governments and insurers to be more prepared for the unexpected.

It depends on a lot of variables, such as frequency, modality, severity, etc...., but all natural disasters can inflict tremendous financial hardship to individuals and businesses.  Looking back a few years, Hurricane Katrina inflicted tremendous damage to the great city of New Orleans, ruining homes, destroying businesses and depopulating the city of citizens who were forced to relocate.  Similarly, the events of 9/11 inflicted a similar amount of damage to lower Manhattan.  Any type of catastrophe, even man-made events, such as terrorism, can wreak havoc on individuals, businesses and communities, so it is important to employ a wide spectrum of loss prevention measures, including the purchase of insurance to help absorb losses.  

As simple as it may sound, strong building codes, enforced building codes, is the best thing legislatures can do to mitigate loss of life and property damage. Governments or legislatures tend to create policies that have the unintended consequence of allowing for construction of homes and businesses in high risk areas, rather than creating more thoughtful policies that would not incentivize building or re-building in flood plains or high risk regions. 

A government should recognize that the private sector plays an integral role in helping deal with unpredictable losses.  Private capital, whether it be in the form of insurance products, catastrophe bonds or other risk-transferring mechanisms, is a critical component of a thriving society, which helps individuals, businesses and communities respond to unpredictable losses.  The government  can play an active role by fostering a marketplace that allows insurers to properly price risk, create products and respond to customer needs to ensure they are able to assist with unpredictable losses.    

Economies and governments that allow for a robust global insurance market are best prepared to respond to all the challenges associated with a major catastrophe. Specifically, countries that allow for global re-insurance markets are able to better spread the risk and more quickly recover without as much local negative economic impact. 

In 2010 the Federal Emergency Management Agency (FEMA), whose role is to assist in  coordinating the response to a  major domestic disaster once the Federal Government has declared a state of emergency, had a $10.3 billion dollar budget. Among other things, these funds go towards state and local programs, Emergency Management, disaster preparation and mitigation and emergency food and shelter after a storm.

In addition to the state and federal government, the private industry also plays a major role via catastrophe insurance. As a global personal lines and commercial insurer, in addition to providing coverage to our customers, we work to ensure that our clients are prepared should a natural disaster strike, for example through our risk managers working one-on-one with customers, and that we are there to assist in the aftermath, as we recently saw with Tropical Storms in the North East and tornadoes in the Midwest . 

You correctly note that the US is regulated primarily on a state by state basis. However, the federal government can take positive or negative actions to encourage policies that support global risk sharing, or result in negative protectionist policies that would increase consumer prices. 

After all events, there are short term negative impacts to economic growth. But governments and economies that provide for a strong private insurance and re-insurance market, tend to have positive post disaster economic growth and recovery. 

The example and difference between a post disaster economic recovery, would be to compare the economic recoveries of Chile and Haiti after their respective earthquakes.

When available and pre-planned, in most cases, the best approach to handling catastrophes is a mix of public and private resources. While government provides an indispensable role in coordinating overall disaster first response and providing a large component of relief, the insurance industry also play a crucial role in handling customer claims, aiding the wave of early responders, and encouraging loss mitigation with incentives in its products. Where little or no private insurance exists, local governments tend to know the needs of their people best and in coordination with private charities, like the Red Cross, can address the needs of local citizens the best.  In an enormous crisis, a coordinated response by all parties is normally the best approach.  Within the past decade, the Terrorism Risk Insurance Act was a good example of a public-private partnership that stepped in to manage the prospect of catastrophic risk 

While I don't have the numbers on hand to respond to your question on average GDP decline, we do know from our experience in California with the Northridge earthquake and other regions, where a robust insurance and re-insurance market does exist, GDP in the long term is not negatively impacted. In fact, it actually improves as a result of the insurance claims payments. 

By definition, the impact of near-apocalyptic disaster would depend so heavily upon a mix of factors and contingencies that it is impossible to say which country would be best prepared. The Fukushima reactor situation illustrated that even a country with generally excellent preparedness can run into unforeseen challenges.  The same can be said about the U.S.'s response to Katrina. The best path forward is for all countries to be prepared for disasters as fully and as globally as possible. This means strong public-private partnerships to deal with catastrophic events, robust global insurance and reinsurance markets to spread the impact of losses widely, strong public education and building codes for disaster preparedness, and a rigorous effort by all policymakers and private sector decision-makers to imagine and plan for the unthinkable before it happens. Finally, efforts by some parties to place restrictions or develop protectionist policies for reinsurance will only complicate and limit the ability for the best global response to large and complex natural disasters.   

The best way to protect any investment is to diversify risk.  Whether it's a stock portfolio or a piece of real estate, a person, or business, should look for opportunities to minimize risk and, where appropriate, shift loss to another party.  For stocks, this means diversifying one's portfolio with a wide-spectrum of investment options to better absorb market fluctuations.  For a piece of real property, such as a home, the purchase of homeowner's insurance is a solid way to shift financial risk.  Whether it's a windstorm or hail damage, the purchase of insurance shifts the risk of loss away from a person, or business, and onto the insurance company, which allows the person, or business, to better absorb the financial loss. 

In today's globalized economy, a catastrophe that strikes anywhere in the world is liable to have effects around the globe. The potential fallout from the recent earthquakes in Japan is only the latest example. This event impacted supply chains and key components of manufacturers globally.  Governments and companies must remain vigilant at all times to ensure that the secondary effects of events that start elsewhere are properly contained and managed. For insurers this means that risks must be diversified, exposures must be carefully balanced by type and severity, and adequate reserves must be kept in place to deal with unexpected events.