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Natural catastrophes evolve into complex web of risks


Every risk manager knows that risk is not static. Even the most predictable risk can mutate. A slight change in technology or weather may turn what looks like a perfectly manageable risk into something quite different — and difficult.

Such a sequence of events is playing out now, as a recent summit sponsored by Lloyd's of London and Washington-based risk management consultant Risk Cooperative underscored. Although the summit was designed in part to discuss the implications of Lloyd's 2015-2025 City Risk Index, some of the participants examined risk's nature in a different context — one that risk managers will increasingly have to consider

That is context of the nexus of man-made and natural risk. At first it would seem to be almost a no-brainer that man-made and natural risk would intersect and affect one another. It's happened since the beginning of recorded history. Somebody builds a fragile structure — a man-made risk — athwart an earthquake fault, which is a natural risk. The quake happens and the building crumbles.

What's happening, though, is that the interaction between the two types of risk is growing ever more complex due to changes in the scope of both.

The impact of hurricanes provides an example. Hurricanes are not surprises. Their destructiveness has been recorded for centuries. But in recent decades, the potential effect of these natural risks has increased. Why?

In the United States, at least, more and more people want to live close to the ocean. That's understandable, but more people mean more buildings, and more buildings mean more exposed property.

Now factor in evidence that the sea level is rising. Sea levels have risen and fallen for millions of years. The increase doesn't have to be spectacular to have an impact as more water washes across lower land. That can mean more destruction when a hurricane makes landfall.

Now factor in yet another variable: government actions that can create moral hazards even though the intentions of the policies are benign. If you encourage people to build in hurricane-exposed areas by providing them with insurance that's priced artificially low for political reasons, they will build. If you rebuild structures on ravaged shores just as they were before the storm struck, with no requirement for more wind- and water-resistant construction or other enhanced loss control, you're inevitably going to pay again.

Fortunately Congress — of all institutions — has taken a first step toward addressing this issue. The House of Representatives approved the FEMA Disaster Assistance Reform Act last month, which calls for a comprehensive study through the National Advisory Council on disaster costs and losses for the federal government and how to mitigate them.

It may just be a study, but it recognizes that the collision of natural and man-made risks exists. And for a governmental body in the current political environment, that's a good start indeed.