The Business of Predicting the End of the World

Most of us only think about natural disasters when we absolutely have to (or when it's, uh, for fun). But for scientists and analysts who work for global insurance companies, predicting the next big catastrophe is a business—and an increasingly lucrative one, at that.

Swiss Re, the second largest insurance company in the world, is leading the way. Swiss Re does what's called "reinsurance"—they insure other insurers. That means their analysts are responsible for keeping track of risk all over the world. That includes metrics like where the worst risk for flooding in China is, for example, and where the next big earthquake is destined to occur. It's a Sisyphean job—and it gets more complicated with every passing year (more on that later).

The Business of Predicting the End of the World

27.7 million people are at risk in Jakarta, putting it as #4 on the global list. Image: Hywit Dimyadi.

The company's newest report on natural disasters, Mind the Risk, assesses the threat of natural disasters in 616 different cities. To simplify things a bit, the report categorizes disasters by type—with the five main types being river flood, earthquake, windstorm, storm surge, and tsunami. The report also quantifies which cities are the riskiest, both in terms of people vulnerable and productive work hours lost.

The Riskiest Cities on Earth

So, who has it the worst? There are several ways to cut the data, but the answer is Asian cities, almost unequivocally.

The Business of Predicting the End of the World

When all five risk factors are aggregated, the three riskiest metro areas in the world are Tokyo-Yokohama, China's Pearl River Delta, and Osaka-Kobe.

Globally speaking, the biggest threat isn't an earthquake, actually, but river flooding—over 379 million city dwellers are at risk worldwide, in comparison to the 12 million at risk of a tsunami, or 157 million risking a wind storm. That's because so many cities in China and India, in particular, sit on low-lying floor plains.

The Business of Predicting the End of the World

Tokyo topped to the list of riskiest cities. Image: Getty/Atsushi Tomura.

Then there's another type of metric to judge: Productivity. The idea of estimating risk by the loss of productive work hours might seem inconsequential in comparison to human life—but it has to be done.

For example, when Sandy hit New York roughly a year ago, it affected not only the city's infrastructure and citizens (including this very company!), but the economy of the entire United States. New York is responsible for a massive eight percent of the country's economic output.

Because Swiss Re insures companies—so a big part of their business deals with blows to productivity, too.

The Business of Predicting the End of the World

Residents plant beach grass on protective sand dunes in the Breezy Point neighborhood on the one-year anniversary of Hurricane Sandy on October 29. Image: Getty/Spencer Platt.

Swiss Re's estimates differ when it comes to economic risk. There wasn't a single European city in the top ten list judged by people affected (and only one American city, Los Angeles). But when it comes to working days lost, things are skewed toward cities in Europe, Japan, and the United States, with L.A., New York, and Rotterdam following Japan's major metropolises.

Google Earth For Catastrophes

So, where do analysts even begin to estimate numbers this big?

At the most basic level, the process of predicting disasters begins with the measuring sticks we use to judge the ones that have already happened. Scales like this are a relatively new phenomenon. The Richter scale is probably the oldest—it dates back to 1935, while the Saffir-Simpson Hurricane Wind Scale was only established in 1971. In 1999, scientists established the Torino Scale, a standard for judging the hazards that comets and asteroids pose to humans—a very real threat, although not one covered in Swiss Re's report.

The Business of Predicting the End of the World

A meteor enters Russian airspace over Chelyabinsk in February, 2013.

These gauges are what make it possible to create weather models that predict future events, which is exactly how Swiss Re makes its estimates.

I thus got in touch with Oliver Schelske, Swiss Re's Senior Risk Research Relations Manager, to find out more about the process. As Schelske told me over email, analysts use a a program called CatNet to assess future threats and vulnerabilities.

The Business of Predicting the End of the World

CatNet's assessment of earthquake risk in Europe. Image: Wirtschafts Woche.

CatNet is a software developed in-house to map natural hazard information—think, a Google Earth-style browsing tool that shows you every possible disaster scenario, from tsunamis to volcanoes. Just like you'd turn on "landmarks" in Google Earth, you can turn on "earthquakes" in CatNet and see a flood of red spreading over the world.

CatNet lets the company create geographical models of disaster impact. For example, here's a ranking of people potentially affected by storms and storm surges:

The Business of Predicting the End of the World

And people potentially affected by river floods:

The Business of Predicting the End of the World

And, of course, people potentially affected by earthquakes and tsunamis:

The Business of Predicting the End of the World

How frequently does this terrible and magnificent software get updated? "In general, Swiss Re re-determines insured nat cat [natural catastrophe] risks on a yearly basis," Schelske explains. "Swiss Re permanently monitors the work of scientists in regard to nat cat risks and in regard to climate change."

A Booming Industry

Climate change is already altering how companies like Swiss Re operate; because it's skewing the data in such an extreme way, the process of building a reliable model for determining risk is more complicated than ever.

The increase in disasters has also spurred a run on scientists who study these phenomena (not to mention people who write novels about it), who are now incredibly sought-after by insurance companies. In fact, a recent Nature article on the boom reports that Swiss Re has snapped up scientists from the Federal Institute for Snow and Avalanche Research to help establish expertise on landslides.

The Business of Predicting the End of the World

Macau is an economic driver in the Pearl River Delta. It's also massively at-risk for flooding. Image: Richard Li.

Beyond climate change, the world is evolving in many other ways that affect insurers. For example, young, untested cities are growing by leaps and bounds in low-lying areas of Southeast Asia. And, increasingly, cities are driving the economic health of countries across the board—which means that when they're affected, the entire GDP can go into a tailspin.

Swiss Re's report ends with a call to action to cities: Don't ignore the looming threats, either to life or economic growth. Invest in infrastructure. Work with the UN to develop a risk management plan.

However, "There will always be costs for relief, recovery and reconstruction," the analysts add. "The impact of a large natural disaster can only ever be avoided to a certain extent."