Going up in smoke

Going up in smoke

It’s not just Australia – severe wildfires are a rising risk factor for the global economy

By Wendy Pugh

Bushfires burning across Australia since spring have destroyed homes and cast a smoky haze across the country in a stark example of a rising economic threat flagged in a Cambridge University report.

The Cambridge Centre for Risk Studies estimates in an annual assessment that $US584 billion could be wiped off global gross domestic product (GDP) by catastrophic events this year, and natural disasters are the largest overall threat, with a potential toll of $US179 billion.

The Global Risk Outlook 2020 is based on an index that quantifies the impact of future catastrophe shocks on the world’s economy, as represented by 279 cities that account for 41% of the world’s GDP.

A market crash, interstate conflict and tropical windstorms are the top three individual threats in the index, while geophysical hazards including earthquake, tsunamis and volcanoes have the potential to cause the most devastating impacts across large regions.

But the report says that in the context of climate change, wildfire is a growing risk, notably in populated areas of California, eastern Australia and southern Europe. The fires which broke out across Australian states this summer, generating more than $1.9 billion in claims, escalated after the report’s release.

“In addition to the tragic human and environmental loss caused by the fires, a significant economic impact can be expected,” Centre for Risk Studies Environment Risk Research Lead Oliver Carpenter tells Insurance News.

Apart from direct losses through property damage and destruction, the fires have caused economic disruption in urban areas, with the smoky haze in cities such as Canberra, Sydney and Melbourne affecting everyone.

“In such events, productivity decreases, consumer confidence drops and air pollution causes direct harm to industries such as agriculture and tourism,” Mr Carpenter says.

California has experienced successive record-breaking wildfire seasons, causing insurance responses and unprecedented economic losses that are at magnitudes historically associated with other hazard types.

Utility company Pacific Gas & Electric was found responsible for the California Camp Fire in late 2018, when electrical transmission lines ignited the blaze, causing it to alleviate its risk last year by cutting off supply to 2.4 million residents.

Estimates suggested the economic impact of the outages could range from $US65 million to $US2.5 billion, depending on the duration of the cuts.

The decision to use forced blackouts prompted outrage, but questions about how to live with more frequent and severe wildfires will become more critical as the value of exposed assets continues to grow in the state.

“Regions of the world exposed to wildfire risk are likely approaching a ‘new normal’ as global temperatures continue to increase and we must learn to live with more frequent and severe wildfires,” Mr Carpenter says.

The Cambridge analysis of 22 threats estimates that overall global GDP at risk this year is up 3%, partly reflecting economic expansion, emerging threats such as cyber attack, and shifts in the pattern of potential loss to threaten higher-growth regions.

Value at risk increased from commodity price shocks, extreme weather, power outages and pandemics, while it declined for terrorism and solar storm. A more detailed analysis of coastal cities resulted in an increase in the flood risk assessment. Wildfire is not named as one of the 22 threats, but the report says it is a key factor in the increased risk from power outages.

“Corporate risk is escalating along with the cadence and ferocity of climate-related catastrophes,” Chief Scientist Andrew Coburn says.

“While reinsurers saw a year of below-average insurance losses in 2019, they remain wary of events that could generate record losses like the 2017 hurricanes and an increasing number of wildfires.”

When it comes to the cities exposed, Tokyo has the most GDP under threat, with interstate conflict representing its largest risk. Istanbul, New York, Manila and Taipei round out the top five cities.

In Australia and New Zealand, a market crash is the top threat to GDP for the eight cities included. The threat’s contribution ranges from 52% in the case of Sydney to 30% for Wellington.

Sydney is ranked 76th in the overall index, with $US2.33 billion at risk, followed by Melbourne with $US2.31 billion. Auckland has $US740 million GDP at risk, while Wellington has $US280 million.

Dr Coburn says the time it takes cities to rebound after an event depends on access to funding, including insurance and aid.

“Better access enables faster recovery and therefore higher resilience to shocks to the global economy,” he says. “The insurance world is central to global recovery.”