Why Natural Disasters Are More Expensive—But Less Deadly

Slide Show: The Costliest Disasters Since 1980.

The recent earthquakes in Haiti and Chile come at the end of what may be history's most expensive decade for natural disasters. The Inter-American Development Bank estimates that the Haitian earthquake dealt about $14 billion in damage. As large as that figure is, it's relatively small compared with the costliest disaster of the past decade: Hurricane Katrina, which caused an estimated $125 billion in damage. According to Munich Re, one of the largest companies in the world that reinsures disaster risks for insurance companies, disasters' costs to insurers have doubled in the past decade compared with the 1990s.

[Slide Show: The Costliest Disasters Since 1980.]

"The past decade has been the costliest for natural disasters ever," writes Howard Kunreuther and Erwann Michel-Kerjan of the Wharton School of the University of Pennsylvania in their 2009 book, At War With the Weather. This decade follows a trend of massive increases in overall losses from disasters: Costs jumped from $93.3 billion in the 1960s to $778.3 billion in the 1990s.

The number of observed disasters is also rising—by about 5 percent per year since 1960. According to David Stromberg, associate professor at the Institute for International Economic Studies at Stockholm University, population growth (meaning more people come in contact with disasters) explains only about half of this increase. A more important factor behind the increase might be better reporting—better seismographs for earthquakes and more-responsive aid organizations.

While the economic cost of disasters has been rising, a perhaps more important value—the death toll—has been falling. From 1900 to 2003, 62 millions deaths resulted from natural disasters throughout the world. But 85 percent of those deaths occurred between 1900 and 1950.

[Also see 10 Countries in Deep Trouble.]

Why the lower death toll, when the number of disasters has not dropped? The reason disasters are becoming less deadly is also the reason they are becoming more expensive.

In 2005, Matthew Kahn, a professor at the University of California–Los Angeles Institute of the Environment, noticed an interesting statistic: Sixty-five percent of the world's deaths from disasters between 1985 and 1999 occurred in countries in which incomes were less than $760 per capita. But many of the poorest countries, such as Bangladesh, are located in regions particularly prone to natural disasters like flooding. So Kahn sought to answer the question: Are poor countries hit harder by natural disasters because they experience more frequent or more severe disasters or because poor countries are just inherently more vulnerable, no matter where they are located?

Kahn's 2005 paper found that the higher death toll in some nations was not explained by a large number of catastrophes or particularly severe earthquakes, floods, droughts, or other shocks. In fact, Africa, the poorest continent, suffers fewer disasters than much of the rest of the world. After controlling for the number of natural disasters and the intensity of those disasters, wealth was the most important factor in determining why some nations have higher death tolls from disasters then others. Specifically, Kahn found that if a country's gross domestic product per capita increased from $2,000 to $14,000, that country would have 764 fewer deaths from natural disasters a year.

[See How Greece's Debt Crisis Affects America.]

Kahn cites the recent disasters as examples of his theory at work. Chile, with a GDP per capita of $14,700, compared with $1,300 for Haiti, could afford protections that Haiti could not, and it suffered far fewer deaths. "In Chile, we know that they had better building codes," Kahn says. "A richer guy can afford a home built from better materials. In Haiti, many houses were built with cruddy materials."

But being richer also means that there is more wealth to destroy. A disaster like Hurricane Katrina might cause fewer deaths than a disaster like the earthquake in Haiti, but it creates an additional $111 billion in damage because there are more valuable things in the United States—homes, bridges, roads, and the like—that are destroyed.

The fewer deaths of the past 50 years go hand-in-hand with the more expensive disasters. Increased wealth means societies are less vulnerable to disasters, but when they occur, they are more expensive. "Even as disaster mitigation lowers the total percentage of capital stock that is damaged, when the capital stock itself goes up, it's possible that the total damage goes up as well," says Eric Werker, an assistant professor at Harvard Business School.

But there is a major factor that could complicate the relationship between economic development and natural disasters. In the past 30 years, the world has seen more droughts, floods, and tropical storms resulting from climate change, according to the Intergovernmental Panel on Climate Change. "Climate change is going to raise the damage caused by natural disasters," says Kahn. It's possible that even as countries get wealthier and better prepared for disasters, it won't be enough to keep up with the damage caused by more severe storms.

The good news, says Kahn, is that more economic growth can help societies prepare for that possibility. "Our best strategy to adapting to these risks is economic development," he says. He cites cars as an example. More money allows people to buy more expensive cars that are generally cleaner to operate, as opposed to cheap, used clunkers that pollute the environment. "If we all drove around with 20-year-old vehicles, there's be more pollution and we'd be less safe," Kahn says.

More money also means that people have more to donate to countries like Haiti when disasters strike. Aid to poor countries that suffer disasters can be a double-edged sword, however. Researchers such as Werker have observed that when aid pours into a country following a disaster, it can create a "bailout effect" similar to what was seen during the financial crisis. "Just as large financial institutions know that, since they are 'too big to fail,' the government will bail them out in a crisis, so, too, can individuals or even governments expect to be bailed out in the event of a natural disaster," says Werker.

Haiti's government was too poor to meet many basic obligations. One was disaster prevention. "It would be fair to say that spending government revenue on disaster prevention wouldn't have been on the top of the priority list, in part due to the expectation that this was the class of expenditures that donors would deal with after the fact," says Werker. 

This is not to say Werker believes all disaster aid to poor countries is a bad thing. Instead, he argues that countries and citizens with money to give should shift their priorities. "It's probably safe to say that as a whole, the international community is too focused on relief over prevention," he says. 

Werker suggests that donors give money to areas that will allow poor countries more of the same advantages that rich countries can afford: building codes and enforcement, dikes, levees, early-warning systems for tsunamis, and basic infrastructure like irrigation and rural road maintenance to combat droughts.