Disaster Risk Management Reborn

Erwann Michel-Kerjan


December 1, 2009

What new world order will emerge from the current economic turmoil? Will this month's Copenhagen Climate Conference lead to a more rigid international regulatory framework to tackle climate change? Has the world become more secure or more vulnerable to possible mega-terrorist attacks eight years after September 11?

It comes as no surprise that those questions are quickly becoming part of the international agenda. Large-scale catastrophes have unfolded at an unprecedented rate recently; of the 25 most costly insured world catastrophes in the past 40 years, two-thirds have occurred since 2001.

Is this a sign of what the 21st century has in store? Most likely. First, the scale and intrinsic nature of risks is changing. Take natural disasters. There is a significant and continuous increase of population and value in high-risk areas. As challenging as this is with 6.6 billion people, imagine how much more challenging it will be when the world population reaches a projected 9 billion in 2045, combined with expected changes toward more extreme weather patterns.

Second, globalization continues to intensify. While this has brought significant economic growth and raised the economic status of hundreds of millions of people on the planet, the downside is that risks are becoming global, too. Catastrophes today have economic and social impacts that cross national borders and can have ripple effects very far away. Financial risks, climate change and terrorism, while different in nature, also present similarities including high uncertainty, large economic and social costs and interdependencies.

As a result, the time-worn concepts that all risks can be quantified and managed locally, and that disasters are improbable enough that they can be considered marginal are clearly outdated. The traditional concept of disaster risk management is dead. An update is necessary. In a globalized economy, governments need to be proactive prior to the occurrence of catastrophic events, rather than hope they will not occur under their watch. But where to start?

To address these issues and develop sound policies, the Organization for Economic Cooperation and Development (OECD) and its 30 member countries launched an international network on the financial management of large-scale catastrophes several years ago. This network offers a platform to promote the exchange of information and experiences about global risks among hundreds of policymakers and leading experts from industry and academia. Under the leadership of its advisory board, the network also supports international studies to develop knowledge, propose recommendations and develop concrete action principles in a timely fashion. For instance, the network met with senior government officials in China following the 2008 Sichuan earthquake to provide them with expertise on long-term solutions. They later met with Thai officials in September in Bangkok to draw conclusions and lessons learned five years after the 2004 tsunami. The group will be meeting in Paris in the spring of 2010 to review terrorism insurance markets in hopes of keeping attention focused on security threats.

Catastrophes will continue to occur-most likely at an increasing pace and on a larger scale. Either top decision makers continue to treat them as low-probability events that do not deserve much attention (except immediately after they occur, when public and media pressure is at its peak), or they start seriously considering global risks in more systematic way.

New initiatives must be content generators rather than simply gatherings where we exchange views. We must study catastrophic risks, quantify this knowledge and turn it into actionable recommendations, so that we can measure our progress and success over time.

Experience shows that this helps countries become more resilient to all sorts of disasters-saving lives as well as insurance payments and government relief. In doing so, we also restore a sense of collective confidence in our capacity to deal with future catastrophes around the world. As risks become more interdependent, so must our responses.

Welcome to the new disaster risk management.
Erwann Michel-Kerjan, professor at the Wharton Business School, is chairman of the Organization for Economic Cooperation and Development (OECD) Secretary-General High Level Advisory Board on Financial Management of Large-scale Catastrophes.