Bending the Cost Curve Through Better Design

The financial costs of natural disasters have been steadily climbing in recent decades. For policy makers to reverse this trend, they must understand the nature of the risks they face, the short-term and localized lenses through which financial decisions are viewed, the pricing signals for risk, and the standardized building measures needed to strengthen development practices.

In the 10-year period from 2004 through 2014, natural disasters caused $1.4 trillion in damage globally, affecting 1.7 billion people and taking the lives of 700,000. The United States experienced more disasters over this period than any other country except China, at a cost of $443 billion in damages – winning the dubious prize for the most disaster damages, and representing close to a third of total global losses. When placed in historical context, this 10-year period accentuates a dramatic increase in the costs of natural disasters over the past 50 years. To understand what is driving this trend, and what can be done about it, key factors contributing to the rising costs of disasters must be examined.

Key Factors in Rising Disaster Costs

Three key factors underlie the rise in disaster costs: (a) The variability and intensity of hazards are increasing; (b) exposure to natural hazards is increasing; and (c) vulnerability – both social and structural – is increasing.

Variability and intensity of hazards. Changes in the climate are shifting hazard patterns and are expected to further increase the severity, frequency, or scale of extreme weather events in coming years. Drought in the western United States over the past decade has resulted in the driest conditions in 800 years; heat waves have become more frequent and intense, with 2011 and 2012 experiencing almost triple the long-term average; intense deluges will continue to hit the Northeast in greater numbers; and more rapid swings are occurring between weather extremes.

The Mississippi River in 2011 and 2012 offers a good example: in 2011, the river experienced its worst flooding in decades, and the U.S. Army Corps of Engineers resorted to blowing up levees in order to protect towns and cities from rising floodwaters. A year later, the river was running at historic lows, and dredging was necessary to facilitate the continued flow of barge traffic.

Emergency managers typically assess hazard risk based on the historical record, but prior experience is no longer a sufficient predictor of future conditions. Climate change is challenging the “rear-view mirror” approach to risk assessments, forcing emergency managers to find new ways to accommodate greater uncertainty in decision-making processes.

Exposure to natural hazards. In 2008, for the first time in human history, more people lived in urban areas than in rural areas, and the pace of urbanization continues to increase. Globally, urban populations are expected to double by 2050, to 6.2 billion. More than 80 percent of the U.S. population lives in urban areas, and as Superstorm Sandy clearly demonstrated, large-scale disasters in densely populated coastal cities present a new of complex challenges.  Coastal counties comprise only 17 percent of the nation’s land area, but contain 52 percent of the U.S. population, and they continue to grow.

Furthermore, there have been massive increases in development in hurricane-prone regions of the country. The insured value of property along the Atlantic and Gulf coasts rose by nearly 50 percent from 2004 to 2012, from $7.2 trillion to $10.6 trillion. Finally, the globalization of supply chains has raised the likelihood of second- or third-order disaster impacts that are hard or impossible to predict. For example, Japan’s 3/11 triple disaster not only devastated that country, but it disrupted truck production in Louisiana, affected energy policy in Germany, and sparked a sell-out of potassium iodide on the West Coast of the United States.

Vulnerability – both social and structural. The U.S. population is growing, aging, and diversifying. It is projected to grow by more than 60 million over the next 25 years, and the percentage of the population over the age of 65 in the United States is expected to increase from 15 percent in 2014 to 22 percent in 2040, shifting the types of services required in the wake of disasters. The population is also diversifying. By 2044, the United States will be a majority-minority nation, continuing to introduce greater complexities in terms of language and cultural diversity into disaster response.

In recent years, high unemployment/underemployment and severe income disparity have been among the World Economic Forum’s top-identified global risks. In the United States: poverty rates have been growing; savings rates have been declining; and disasters have not been democratic. These factors disproportionately affect the poor. Indeed, Munich Re, one of the world’s leading reinsurers, has estimated that half of total economic losses from a disaster come from uninsured losses.

Furthermore, greater numbers of people are living in urban areas with dense concentrations of infrastructure that is often operating beyond its original design criteria, and in areas facing increasing hazard risks. With respect to structural vulnerability:

  • Americans take more than 200-million daily trips across structurally deficient bridges; 

  • An estimated $21 billion is required to retrofit existing dams; and 

  • U.S. levees barely passed the American Society of Civil Engineers’ test, receiving a D-. 

So, it is not surprising that the costs of disasters are increasing. Complicating these trends is the fact that the replacement cost of most infrastructure has increased faster than the rate of inflation. For example, New York City estimated the costs to the city from Superstorm Sandy at $19 billion, and projected the costs associated with the same storm in 10 years to be $35 billion, a near twofold increase; in 40 years, the estimate was $90 billion. Together, all of these factors combine to reveal the prospect of a “new normal,” whereby more-frequent and more-costly disasters will progressively continue – and in a time of increasing fiscal constraints at every level of government.

Calibrating Risk & Reward

To succeed in this environment, both public safety professionals and policy makers must strengthen their capability to adapt. How government, nongovernmental organizations, businesses, and individuals work together toward shared outcomes must be more deeply institutionalized. In addition, government actors must begin to think differently about how they engage with and support the private sector to restore critical services after a disaster.

Finally, it is necessary to actively account for and enable the immediate, independent mass-response actions of citizens during crises. However, no matter how effective the preparedness and response efforts, it will never be possible to truly temper the rise in disaster costs (let alone reverse it) unless there is a more accurate calibration of risk and reward in decisions concerning where and how to build.

Better Pricing Signals for Risk

On 13 April 2016, Administrator W. Craig Fugate of the Federal Emergency Management Agency spoke at the National Emergency Managers Association’s Mid-Year Forum in Alexandria, Virginia. Fugate called for a frank discussion about the nation’s development decisions, including what is built, where it is built, and who ultimately bears the risk.

Too often, communities make decisions about new developments – and the standards to which they will be built – through lenses colored by short-term interests (e.g., the immediate economic benefits to the community, potential for job creation, prospects for attracting new tourism), without adequate consideration of risk accumulated over the full lifespan of the new development. This has led to developments that may be insurable today but may not be insurable in the future – and, in the case of public infrastructure, may lead to an increasing reliance on self-insurance by governments at every level. As Fugate stated, this has the effect of transferring the risk to the public, but the public does not see that transfer. Long-term risk is invisible because it is not captured on balance sheets. It remains invisible until it reappears in lost productivity, uninsured loss, and the cost to the public to rebuild infrastructure following a disaster.

In addition, the financial risks associated with new developments – whether from the standpoint of lenders, developers, or insurers – are all short-term in nature. There are no effective metrics to price the aggregate risk of new facilities over time into upfront development decisions. This creates skewed financial incentives that encourage further building in hazard-prone areas, as well as a vicious cycle of ever-increasing exposure, hazard risk, and costs to rebuild after a disaster.

Stronger Building Codes

One of the most powerful tools for mitigating disaster risk to date has been the use of model building codes. For more than a century, U.S. communities have used building codes to set a baseline standard for building safety for their citizens. Yet, these codes are typically designed around minimum life-safety standards and are not meant to ensure the continued survivability and functionality of the structure in question after a disaster. Simply put, they are designed to ensure that the occupants can survive the disaster, but the building itself may still need to be razed and rebuilt – driving up recovery costs.

Embracing stronger building codes, including code-plus programs and performance-based approaches to building design, can allow for greater resilience to be built into the design criteria for infrastructure, affording improved survivability not just for occupants, but also for the functions and services supported by the facility in question. An excellent example is the establishment of the Federal Flood Risk Management Standard (FFRMS), which requires all future federal investments in floodplains (and areas affecting them) to meet a higher level of resilience. Expanding the FFRMS approach to other hazards and emphasizing the broader adoption of code-plus standards in communities allows for the design of greater resilience into the built environment as more-dynamic risks arise in the future.

To truly aspire to becoming more resilient as a society (i.e., with more resilient infrastructure), then the true price tag associated with risk exposure over time must be designed into investment and development decisions. The design criteria for infrastructure, facilities, and homes must address not only today’s risks, but also those of tomorrow.

David J. Kaufman

David J. Kaufman is the vice president and director for safety and security at CNA, a nonprofit research and analysis organization located in Arlington, Virginia. He is the former associate administrator for policy, program analysis, and international affairs at the Federal Emergency Management Agency, where he served from 2009 to 2015.



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