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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 horribilis for 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 fumes threatening 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.

When the City Risk Index was first launched in Washington, D.C. and at Carnegie Hall in New York (making resilience cool), it presaged a series of unfortunate events in the U.S. and around the world. Today, the often uncomfortable and politically untenable conversations about shoring up resilience and whether to build back better (or build back at all) seem all too real. The failure of making resilience a whole of government and a whole of society priority has some dangerous social, economic and environment consequences. 2017, yet again, brought this reality home in some painful ways, whether in Puerto Rico, which was devastated by record-breaking hurricanes, or Houston, the 4th largest city in the U.S. and elsewhere around the world. Cities in the crosshairs of complex threats are the stage where humankind and risk will ultimately settle their score. Risk currently has the upper hand and our long-standing war against the gods and probabilities may never be won. Instead, we must strive for balance between the frontiers of nature, which is our first line of defense, the edge of insurability and our inexorable economic drive.

The scenes of this drama are all too frequent and our lines of defense all too feeble. From the apocalyptic images of Kilauea’s unrelenting lava flows in Hawaii, to Pompeii-like images from Guatemala’s aptly named volcano Fuego’s eruption, which has claimed more than 75 lives with another 200 missing in pyroclastic flows, our transgressions across natural boundaries are not without consequence. Indeed, this much was true during California’s infernal fires in 2017, which were at once the most damaging in terms of property loss and the deadliest in terms of their human toll, which were also exacerbated by man. Nowhere is anthropogenic risk greater than with flood hazards. Houston alone, for example, has had 1,500 years’ worth of flooding in the last 3 years. Ellicott City, Maryland, has suffered 2 1,000-year flood events in as many years and, as is the case across the world, the high rates of underinsurance, poverty and economic duress conspire to leave households and businesses high and dry for the recovery and costs. When it comes to flood risk, build back better, should be replaced by real questions of build back at all and how to enforce resilience into the build code.

California, no stranger to complex risks, offers guidance on how to strategically invest in resilience. Beginning in 2020, 80,000 new homes a year will be solar-ready enabling California to not only wean itself off polluting fossil fuels, improving air quality and micro-climate, but to also enable more resilient microgrids. The challenges exposed in the City Risk Index are manifold and require deep and often uncomfortable trade-offs between the public and private sectors, rich and poor, citizens and their communities. We are as strong as our weakest links and standing to lose an average of $320 billion a year in the world’s major cities ought to sharpen our collective focus on the urgency and benefits of pre-investing in resilience. In this effort, we would be wise to remember that proportionality matters as much as preparation. By this measure, the U.S. government allocating a mere $6 billion to bio-defense and pandemic preparation, while calling for many multiples to build walls, ignores the real danger of one of the world’s most serious threats – one that does not check in with customs or conform to airport security screening.

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