Counting the Cost of Natural Disasters

How economists measure the damage from disasters, why reported losses keep rising, and what those numbers leave out.

Floods, storms, earthquakes, droughts and wildfires cause enormous human suffering and economic damage. Measuring that damage helps governments plan, insurers price risk and aid agencies decide where help is most needed.

Types of loss

Economists separate disaster losses into:

Direct losses: damage to homes, buildings, roads, crops and equipment.
Indirect losses: lost production and income after the event, such as businesses that cannot open or farmers who miss a season.
Human losses: deaths, injuries and long-term effects on health and education.

Why losses are rising

Global economic losses from natural disasters have risen over recent decades. Reinsurance companies such as Munich Re and Swiss Re, which track disasters closely, have reported annual losses in the hundreds of billions of dollars in recent years. Several factors drive this:

Exposure: more people and more valuable property are located in risky places, such as coasts and floodplains.
Economic growth: as countries become richer, there is simply more to damage.
Climate change: scientists find it is making some hazards, such as extreme heat and heavy rainfall, more frequent or intense.

Economists stress the difference between a hazard, like an earthquake, and a disaster, which depends on how many people are exposed and how vulnerable they are.

Insured and uninsured

Reported figures often distinguish insured losses, covered by insurance, from total losses. In rich countries, a large share of losses may be insured. In poorer countries, most losses are uninsured, falling on households, businesses and governments.

Two storms, very different costs

A strong hurricane hitting a sparsely populated coast may cause little economic damage. A weaker storm hitting a large city can cause far more. The difference is not the strength of the hazard but the exposure: how many people and how much property lie in its path.

What the numbers miss

Money figures tend to understate losses in poor places, where homes and possessions have lower market value but losing them can be devastating. A farmer losing a small house and a season’s crop may lose everything they own, even if the loss looks small in dollars.

Thinking rising disaster costs prove disasters are simply more frequent

Rising losses reflect several forces at once: more people and property in harm's way, growing wealth, and changing hazards. Separating these requires careful analysis. Reducing exposure and vulnerability can lower losses even if hazards increase.

Key takeaways

Disaster losses include direct damage, indirect lost income and human losses.
Losses are rising due to more exposure, economic growth and climate change.
A disaster depends on exposure and vulnerability, not only the hazard.
Money figures understate losses for poor households, who often lose everything.