Charting the rise of the disaster economy

With the prevalence of earthquakes, flooding and other catastrophic events seemingly on the up, there has been talk of a ‘disaster economy’ emerging. The private and public sectors will have to work together if they are to adequately support those most in need

Charting the rise of the disaster economy
A recipe for disaster: in 2019 alone, Typhoon Hagibis in Japan and monsoon flooding in China each caused $15bn in damage 

Earthquakes, flooding and wildfires: these tragic events seem to have become ever-present on our screens. This is partly the result of better coverage – disasters taking place thousands of miles away are now shared across the globe. Evidence that conclusively proves these events are becoming more frequent is difficult to pin down, but the data certainly suggests that the biggest and most damaging disasters are occurring more often.

Across 2019, the US experienced 14 weather and climate events that resulted in damages worth over $1bn; the annual average between 1980 and 2019 was just 6.5. Some estimates predict that by 2030, the funding required to support those suffering from climate-related disasters could reach $20bn a year.

The response to cataclysmic events such as those mentioned above – whether naturally occurring or man-made – focuses on the human costs, and rightly so. Damaged property can be repaired, but the loss of a loved one is not so easily healed. Nevertheless, the economic costs of natural disasters must be reckoned with eventually.

While the insurance industry may need to reassess how it operates in a world becoming increasingly prone to disasters, other sectors are being presented with opportunities

Increasingly, with the public sector struggling to cope, private businesses are stepping in to fill the void. The global incident and emergency management industry is predicted to experience a compound annual growth rate of 6.8 percent until 2024, surpassing $140bn in value. Such a rise promises more devastation and more suffering – but that has never precluded businesses from making a profit.

Under the weather
Figures relating to the ‘disaster economy’ are staggeringly large. In 2019 alone, Typhoon Hagibis in Japan and monsoon flooding in China each caused $15bn in damage. According to a report by global professional services firm Aon, across 2019, the top 10 economic loss events resulted in total damages of $232bn.

“Following two costly back-to-back years for natural disasters in 2017 and 2018, there were several moderately large catastrophes [in 2019], but strong capitalisation has allowed the insurance industry to comfortably manage recent losses,” Andy Marcell, CEO of Aon’s reinsurance solutions business, explained in the report. “However, as socioeconomic patterns further combine with scientific factors such as climate change or extreme weather variability, the potential financial costs at play are only going to increase, so building resilience is key.”

While the insurance industry may need to reassess how it operates in a world that is becoming increasingly prone to disasters, other sectors are being presented with opportunities. National governments often drive these opportunities by investing in more effective disaster recovery and response initiatives. In Japan, for example, the national government formed the Reconstruction Agency in February 2012 in order to manage the aftermath of the To¯hoku earthquake and tsunami that resulted in nearly 16,000 deaths and ultimately caused the Fukushima nuclear disaster. At the end of 2019, it was confirmed that the agency’s life would be extended by a further 10 years in order to continue providing affected municipalities with financial support.

Elsewhere, governments have shown an eagerness to undertake careful analysis in the aftermath of accidents and disasters, ensuring that lessons are learned for the future. The US’ National Transportation Safety Board has issued around 15,000 safety recommendations, with more than 80 percent “favourably acted upon”.

Still, there remains a tendency for the public sector to be reactive, rather than proactive, even as disasters become more commonplace. A community-driven response to disaster policy can help in this regard, providing greater focus compared with centralised initiatives that may suffer from a lack of attention on key issues and an inability to see what is needed on the ground.

Good in a crisis
To fill the gap in the public sector response, privately financed start-ups are coming up with the innovative solutions required to create a more resilient world. Often they employ cutting-edge technologies, such as artificial intelligence (AI) and drones, to help mitigate and improve disaster response.

“Governments and international aid organisations are relying more and more on the private sector to support those affected by natural disasters,” Konstantinos Apostolatos, a partner at global management consultancy Kearney, told “Companies using AI and other emerging technologies are generating new relief products and services, and the attention on and investment in these products will spur on additional technological advances.”

Orora Technologies is one start-up that is looking to use technology to deliver faster, more efficient responses when disaster strikes. The company, founded in Munich, uses nanosatellites to help with the early detection of forest fires. The firm’s patented CubeSat architecture combines a multispectral thermal infrared camera that is equipped to detect high-temperature events with a real-time communication link, ensuring that fires are recognised at the earliest opportunity.

Similarly, London-based Tractable uses AI to deliver a holistic view of the damage caused by natural disasters, combining satellite, drone and smartphone imagery. The technology provides a detailed appraisal that can be integrated with an insurer’s own systems. The process should make repairs easier to assess financially. Earlier this year, the firm secured $25m in Series C investment, enabling it to expand into new markets.

Across a multitude of worst-case scenarios, start-ups are finding that there is money to be made. For example, water scarcity has been recognised as a significant global risk for years now, but not necessarily because of a lack of water: countries can struggle with drought and flooding in quick succession. Often, problems are logistical – how to get water from areas where supply is high to those where it is not. Kearney’s Year-Ahead Predictions 2020 report highlights two firms, San Francisco’s Orb and Sweden’s Altered, that are working on ways to reduce water waste. Many others are looking at disaster areas where global problems can be turned into profit.

Going for broke
But before businesses and governments get too excited about the prospect of another hurricane or earthquake, it should be remembered that destruction is never a net gain for an economy. In his influential 1946 book, Economics in One Lesson, Henry Hazlitt devoted an entire chapter to the parable of the broken window.

The broken window fallacy was first explained by French economist Claude-Frédéric Bastiat in 1850. He described a boy who had broken a shopkeeper’s window. “This little act of vandalism will, in the first instance, mean more business for some glazier,” Hazlitt wrote. “The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend [on] a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury)… The glazier’s gain of business, in short, is merely the tailor’s loss of business.”

Proponents of the broken window fallacy often point to the economic growth that accompanies wartime as evidence of the good that can come from destruction. Countries like Japan and South Korea have seemingly used war as a springboard to join the ranks of the world’s most powerful economies. However, this is an overly simplistic view: although Japan did post GDP per capita growth in excess of seven percent in the years between 1945 and 1956 (see Fig 1), this relied heavily on economic aid from the US. In addition, such growth was, to some degree, the continuation of the national economy playing catch-up with the West after years of relative isolation.

What’s more, any post-war recovery must take into account the lower economic base created by wartime devastation. By 1946, for example, Japanese industrial production had fallen to just 27.6 percent of its pre-war level. Although some individuals and businesses did benefit from the Second World War, many more did not. A simple look at the number of flattened factories and bombed-out buildings demonstrates that.

River flooding in China

Silver linings
Aside from start-ups looking to monetise their response to disasters, there is some evidence, albeit mixed, of firms experiencing ‘creative destruction’, which describes how the dismantling of established processes makes way for new means of progress. A 2009 study by Andrea Leiter, Harald Oberhofer and Paul Raschky found that – in the short term, at least – European firms based in regions that suffered flooding displayed a higher growth of total assets and employment than businesses unaffected by flooding. Another study, this time by Matthew Cole, Robert Elliott, Toshihiro Okubo and Eric Strobl, also showed some evidence of creative destruction in the aftermath of Japan’s 1995 Kobe earthquake.

There are several reasons why entire sectors might flourish in the wake of a disaster. In the event of war, it is plausible that an external threat could cause citizens to pull together, boosting productivity. More broadly, disasters could push the most inefficient firms into obsolescence, improving market efficiency and corporate productivity.

“Aside from… survived firms, there is another potentially important channel through which natural disasters may affect the corporate sector: the selection, or exit, of firms due to the disasters,” Arito Ono, Senior Economist at the Mizuho Research Institute, told the World Economic Forum. “If natural disasters expel inefficient firms, or if natural selection is at work, then the average corporate productivity will increase. However, to the extent that efficient firms are also forced to exit, or an unnatural selection is at work, then the overall impact is unclear.”

Unsurprisingly, for every piece of evidence that suggests destruction helps businesses, there are further indications that it simply causes – well, destruction. Economic metrics are not always accurate methods of measuring the impact of disasters, particularly where economic damage is slow to appear. It may be possible to quantify the damage caused to existing businesses when events like the Chernobyl nuclear disaster or Syria’s civil war take place, but assessing the businesses that never launched and the economic benefits that were never accrued – the opportunity cost – is much more difficult.

It seems fairly obvious that every dollar spent repairing flood damage or rebuilding flattened businesses is one that will not be spent on education, healthcare or any number of other essential services. In that sense, destruction is always a net loss to an economy.

Money on the mind
With no immediate end to the world’s climate crisis in sight, we are entering a period where natural disasters are likely to become more regular and increasingly severe. Some argue that talk of a disaster economy is crass when lives are being lost. They do have a point. But capitalism has never been afraid to monetise human suffering. Companies like Uber have been accused of exploiting workers by failing to give them the benefits that would normally be afforded to full-time members of staff, under the pretence that they are enjoying the flexibility of the gig economy. Fashion brands burn huge quantities of unsold stock just to protect their image – valuing long-term profits over the health of the planet.

Even today, when there is so much talk of the ethical consumer, many companies stand accused of saying one thing and doing another. Corporate social responsibility agendas and sustainability initiatives can be found on most firms’ websites, but there is often a darker, hidden side to the business, whether it’s underpaid contractors in some faraway part of the supply chain or using big data to erode consumer privacy.

Across a multitude of worst-case scenarios, start-ups are finding that there is money to be made

When it comes to natural disasters, of course, the ethics are different. Early detection systems for earthquakes, improved flood defences or any number of other solutions to potential crises are not cheap to develop – their creators deserve some reward for their endeavours. And while the social good these efforts will deliver may be enough for some, in reality, profit is a huge motivating force for innovation. As such, governments have a role to play in ensuring the technologies that are likely to prove so vital to the modern disaster economy are made available to the people who need them most. Public-private partnerships offer one way of melding private sector innovation with public sector oversight.

In Japan, private gas firms make use of public sector 3D geographic information system maps in order to manage pipelines and improve communication during emergencies. Similarly, in New Zealand, a risk management framework is employed to ensure local authorities, emergency services and critical infrastructure providers can cooperate effectively. In 1999, the country’s government launched the New Zealand Lifelines Council to formalise these partnerships.

When tragedy strikes, money seems like the last thing that should be on our minds. Unfortunately, the economic impact of natural disasters, rather than the human one, often determines the next course of action in terms of risk assessment, mitigation and recovery. The disaster economy is here to stay and is set to be a growth industry. For private businesses, this provides a two-fold opportunity: to boost revenues while simultaneously helping those most in need. Governments around the world must give them the supporting framework to do both.