Using Economic Metrics for Catastrophic Risks

The idea revolves around using economic metrics as a base point for quantifying current and future catastrophic events for countries and economies lacking robust geography specific data.

The problem: Catastrophic modeling capabilities as of today primarily rely on using accumulated past data from global events and adjusting / extrapolating their impact especially for countries / economies which have low insurance exposure and therefore low experience data. Accommodating for rising trends due to climate shifts on future catastrophic events would create even further subjectivity in model outputs.

The proposed solution: Use of technical expertise to assess what nature of catastrophic events can affect a region such as floods, earthquakes, wildfires is essential also accommodating for climate change. The goal is to broadly quantify ‘Disruptive damage’ - Occurrence of the event leading to lower productivity as against a no event scenario. To do so, use of economic indicators such as Gross Domestic Product (GDP) of the country can be a useful starting point. From here, the economic contribution of all plausible regions prone to any form of catastrophic event would need to be determined accounting for correlations and dependencies. Depending on the nature of events that affect a region, catastrophe induced disruption should be calculated, accounting for current and potential disaster combat and relief measures. Disruptive damage = Lower than usual productivity – mitigation by resilience measures Ideally the disruption damage is expected to be short term thus allowing further cost benefit analysis of currently available sophisticated resilience measures as well as creation of other such measures. Physical damage quantification would have to be an add-on to this.

Wider applicability: Use of a purely economic metric can be expanded to also include biodiversity damage once widely accepted means of its calculation are accepted, impact on welfare indices and further metrics. Using economic growth projections as a basis for growing potential catastrophe exposure can act as a basis for future modeling needs. Inputs to and from the insurance industry can be used for additional credibility wherever necessary.