Calculating the true costs of a disaster

By Jo Harper

A report published by the Turkish Enterprise and Business Confederation has put the cost of the earthquake in eastern Turkey at $84 billion (80 billion euros), about 10% of Turkey’s gross domestic product. About $70.8 billion is from the damage to homes, $10.4 billion from the loss of national income and $2.9 billion from the loss of working days. US data analytics firm Verisk put the economic losses at a minimum of $20 billion, while several other estimates lie in between. Assessing the damage caused by the earthquake in Syria will likely take longer. The scale of destruction may be of a similar magnitude but result in a far lower cost.

DW looks at how these earthquake calculations are made and explores why the estimates vary so much. There are generally two approaches to calculating the economic effects of such disasters, according to Melanie Gall from Arizona State University’s Spatial Hazards Events and Losses Database for the United States (SHELDUS).

One is direct impacts, that is those immediately caused by the event such as damage to homes and injuries. Direct losses may be assessed by professional assessors hired by insurance companies, Gall told DW. Indirect impacts are those that emanate from secondary or tertiary effects such as business losses during shutdowns, loss of income for workers, and people suffering from post-traumatic stress disorder (PTSD) — a mental condition that is triggered by a terrifying event. Such losses are usually calculated using economic models. “For most events, these estimates are ball-parked and do not come from professional estimators,” Gall said.

Insurance companies and insurance trade associations typically make the first estimates, which focus on property damage. Insurers base these estimates on losses covered by insurance and then extrapolate them to include losses related to non-insured property. Adam Rose, a senior research fellow at the Center for Risk and Economic Analysis of Threats and Emergencies at the University of Southern California makes such estimates. He leads a team that developed software for the purpose called Economic Consequence Analysis Tool, or E-CAT.

“Precise estimates of the cost of a given disaster can only be determined after a careful case study, which takes months or years to complete,” Rose told DW. Rose’s software can be used once some basic information on the initial size of the disaster and rough estimates of the extent of resilience and behavioral responses become available.

“An issue here is valuing human life, which typically includes a large portion related to a person’s earnings. These are lower in developing countries like Turkey, so sometimes translating distant injuries into dollars becomes problematic in those contexts,” said Rose.

Categories evaluated are business interruption, the decrease in economic activity measured either in terms of lost revenue, or a combination of lost wages and profits as well as personal income or employment at the macroeconomic level. “The above three categories do not include human misery, such as the number of people left without power or clean water,” Rose added. John Bateman, public affairs officer at the NOAA Satellite and Information Service in the US, also says that many costs are simply not counted.

These would include losses to natural capital or environmental degradation, mental or physical health care related costs and the value of a lost supply chain. “Therefore, our estimates should be considered conservative with respect to what is truly lost,” he told DW.

This article was provided by Deutsche Welle