New research shows rise in wealth is driving increase in global economic losses from extreme weather by US$2.7 billion per year

Posted on 23 Nov 2010 in Press releases

Global economic losses from reported weather-related events have been increasing in real terms by about US$2.7 billion per year since 1980, mainly because of the rise in the amount of wealth that is accumulating in areas that are exposed to potential damage, according to new findings by researchers in the Munich Re Programme at the Centre for Climate Change Economics and Policy, which are published today (23 November 2010).

A new journal paper, by Eric Neumayer and Fabian Barthel of the London School of Economics and Political Science (LSE), describes a new method for studying which factors have been contributing to the rise in economic losses, by taking into account inflation as well as differences in wealth between different locations and changes in wealth over time.

The researchers applied this new ‘normalisation’ method, together with a conventional method that does not take into account differences in wealth and population between poor rural areas and rich urban areas, to the most comprehensive database of economic losses from worldwide weather-related events since 1980, which has been compiled by the reinsurance company Munich Re.

They report their results in a new paper published online today as a corrected proof for the journal ‘Global Environmental Change’. Only one previous study has ever been published on the normalisation of global economic losses.

The researchers found that the conventional method, which takes into account changes in wealth and inflation, produced results that showed no detectable trend in global economic losses from extreme weather between 1980 and 2009.

When the researchers applied their new method, they found a statistically significant downward trend in normalised losses from global reported weather-related events between 1980 and 2009. This downward trend was also found in losses for developed countries, but not developing countries. However, they also noted that the number of recorded weather-related events over the past 30 years has apparently increased markedly.

The researchers concluded that the lack of an upward trend in economic losses once inflation and changes in wealth were taken into account could best be explained by the implementation of risk-reduction measures, such as flood defences and building codes, which reduce vulnerability to damage by extreme weather over time.

They also indicated that other explanations, apart from risk reduction measures, could include data limitations, bias in the reporting of losses, problems in the measurement of the areas affected by loss events, or, much less likely, a decrease in the intensity of weather-related loss events over time.

A new report for the insurance industry by Robert Ward and Nicola Ranger, also published today, points out that when inflation is excluded, economic losses from weather-related events around the world have been increasing by an average of US$2.7 billion a year in real terms over the past 30 years. The findings by Professor Neumayer and Mr Barthel indicate that these losses can be attributed to the increase in the amount of wealth that is exposed to weather-related events.

Professor Neumayer and Mr Barthel also warned against inferring from their results that climate change had not affected economic losses from extreme weather. Professor Neumayer said: “The absence of upward trends in our results for economic losses is fully compatible with a possible rise in the frequency or intensity of extreme weather events. Adaptation and defensive measures may well prevent us from detecting an exposure to elevated weather hazards.”

He added: “Whatever the reason, one thing is clear. Any adaptive response which may be limiting losses by reducing vulnerability is being completely outpaced by the massive increase in the amount of wealth, in the form of homes, business and infrastructure, that is exposed to damage by extreme weather events.”

Commenting on the new research results, Lord Stern of Brentford, who chairs the Centre, said: “A plausible explanation for the apparent absence of upward trends in normalised economic losses over the past 30 years, even though there is a marked apparent rise in the number of reported weather-related events, is the implementation of defensive mitigation measures, which has reduced vulnerability to weather-related damage. Some of this may result from greater risk bringing greater awareness and learning and thus more careful decision making. Increasing relative risk aversion may also be important in interpreting these results: if climate risk were constant then the rising risk aversion would lead to lower normalised losses, because as people become more wealthy they take more precautions with any given fraction of their wealth.”

Lord Stern added: “So what we may be seeing is rising risk due to climate change, resulting in the apparent increase in recorded weather-related loss events, which when combined with increasing relative risk aversion and greater learning leads to the absence of observable change in normalised losses.”

Notes for Editors

1. The Centre for Climate Change Economics and Policy was established in 2008 to advance public and private action on climate change through rigorous, innovative research. The Centre is hosted jointly by the University of Leeds and the London School of Economics and Political Science (LSE). It is funded by the UK Economic and Social Research Council and Munich Re.
2. The Munich Re Programme of the Centre for Climate Change Economics and Policy is evaluating the economics of climate risks and opportunities in the insurance sector. It is a comprehensive research programme that focuses on the assessment of the risks from climate change and on the appropriate responses, to inform decision making in the private and public sectors. This programme is funded by Munich Re and benefits from research collaborations across the industry and public sectors.