Library: Geneva Association – Future urban risk landscapes: An insurance perspective
Today’s urban areas are complex and vulnerable ecosystems made up of a wide range of components, from infrastructure, transportation and health to distinctive economic and social features. These components are increasingly interconnected and interdependent. All drivers of risk have grown exponentially, in particular those relating to hazard, vulnerability and exposure.
Some risks, such as natural disasters, are well-established. Others, such as rising sea levels and the vulnerability of smart power grids, are growing at a rapid rate. Going forward, urban risks are expected to be driven by three main underlying trends: first, climate change and a rising frequency and severity of extreme weather events; second, smart urbanisation and the risk of systemic and catastrophic disruptions; and third, socio-demographic shifts such as income and wealth inequality and the rapid ageing of rich-world populations and infrastructures. These trends have the potential to adversely affect multiple critical parts of a city’s operations, putting the health, lives, livelihoods and assets of inhabitants at risk.
Cities’ systems are changing
Man made climate change is a well-researched major contributor to disaster risk in cities. It not only directly affects the frequency and severity of weather-related hazards but also brings longer-term shifts such as sea level rise, water scarcity and quality issues, as well as sustained higher temperatures and heatwaves. These changes may render existing social and physical systems in cities ineffective, e.g. infrastructure in the face of more frequent storm surges or snow storms, and exacerbate social vulnerabilities.
Most cities are characterised by significant inequalities in economic, social and living conditions. Urban populations are more likely to include displaced people and those with low socio-economic status. Informal settlements, like slums, are the most pronounced manifestation of inequality and continue to be a growing feature of the urban landscape and a persistent risk for municipal authorities, exacerbating the risk of disease outbreaks, as well as civil unrest, riots, crime and violence. However, by facilitating socio-economic mobility and helping overcome gender discrimination, which is typically more severe in rural areas, cities can also contribute to mitigating inequalities. In addition to socio-economic characteristics, demographic shifts impact future urban risk landscapes, notably the rapid ageing of mature market urban populations and the rise of middle-class populations in emerging economies.
Smart urbanisation is characterised by a move to technology-based urban infrastructures aimed at delivering city services more efficiently and effectively, with the ultimate objective of fostering urban resilience and sustainability in a time of rapid population increases and growing environmental and socio-economic challenges. However, the expected benefits such as convenience and sustainability can be accompanied by unintended consequences, e.g. an increasing exposure to catastrophic scenarios such as space weather and heightened security and criminal risks.
A range of challenges to address
The high concentration of people and economic values amplifies the loss potential from disasters caused by natural hazards, but also from man-made industrial disasters, terrorism or infectious diseases. Therefore, given their higher exposure to economic loss, cities have a bigger need and scope for insurance than rural areas. This includes personal lines insurance such as motor, home and life savings products but also commercial insurance in industrialised urban areas, with increased trade and commerce, concentration of business and infrastructure investment as well as a larger formal employment sector. With the rise of city-level risk management, insurance is also set to continue to become more relevant to urban risk mitigation strategies.
However, a number of insurance-specific challenges need to be addressed, too, primarily arising from population density and asset accumulation as well as the interconnectivity of risks. These characteristics have always presented major issues for risk accumulation and modelling underlying risk exposures. Uncertainty surrounding climate change and the increased frequency and severity of weather-related natural catastrophes adds to the list of long-standing challenges. In addition, as demonstrated by COVID-19, increased mobility and high population density can drive pandemic risk.
Fiscal constraints on all levels of government were significantly exacerbated by emergency responses to the pandemic. These constraints will soon make themselves felt. Federal governments may be less inclined to step in as ‘insurers of last resort’ for municipalities, and governments at all levels are set to look differently at private-sector insurers as potential risk takers. Based on our expert interviews and own research, we have made the following four recommendations for insurers and public authorities to consider. Two recommendations require close collaboration between the public and private sectors while the remaining two are more in the court of insurers and municipal authorities, respectively.
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