Cities face an uncertain and increasingly complex array of risks.
Today's cities are growing at an unprecedented rate and are now home to the majority of the world's population and jobs, according to the United Nations. By 2050, 66 percent of the world's population will live in urban areas, up from 54 percent today.
In the report, "Future Cities: Building infrastructure resilience," issued in conjunction with engineering consulting group Arup, Lloyd's of London finds that while risk management remains a priority for cities, it's not enough on its own, or on an asset-by-asset basis. Increasingly, city officials, investors and insurers will need to build resilience within and between infrastructure systems as a complementary approach to address infrastructure risk and uncertainty.
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"Most global population increases are expected to take place in cities that are more at risk from natural hazards, and cities in general are exposed to a greater diversity of risks than ever before, says John Parry, CFO, Lloyd's. "It is absolutely critical, therefore, that city officials, working with insurers and other stakeholders, act to improve city resilience. The principles set out in this report represent a new approach that could substantially improve infrastructure resilience around the world."
|Global trends shaping infrastructure risk
Infrastructure failure can impact human lives, urban assets and economic activity at a local, regional and national scale. Here are four key trends that are shaping future infrastructure risk for cities:
Transportation
Urbanization is driving increased demand for city transport infrastructure, while the rise of private passenger transport and growth in global freight is contributing to congestion and pollution. Climate change is driving more extreme weather events that pose a threat of damage and interruption to transport infrastructure. Increased terrorism also poses a direct threat to infrastructure.
Existing challenges are perpetuated by a combination of poorly designed, aging and insufficiently financed infrastructure. Urban policies that support diversification of transport options, mode-shift away from oil-reliant transportation (supported by increasing use of electricity and biofuel) and drive an increase in active transportation (including walking and cycling infrastructure) can reduce congestion and provide significant co-benefits for human health and wellbeing.
Energy
Population growth, globalization and increased consumption place increasing demand on urban energy systems. The global energy sector will experience major transformation over the coming decades.
An increase in extreme events will play a significant role in the consistency and security of future energy delivery. Climate change will drive an increase in the intensity and unpredictability of climatic hazards. The rise of smart technology for energy distribution must accommodate increased risk of malicious intent and cyber terrorism. Global, regional and local economic shocks and stresses will continue to impact both energy demand and deficits in energy infrastructure investment.
Climate-driven events, social unrest and new types of infrastructure-focused terrorism will have an increasing impact on local water-system continuity. (Photo: Shutterstock)
Water
Temperature extremes driven by climate change will have an increasing impact on global water security. Climate-driven events, social unrest and new types of infrastructure-focused terrorism will have an increasing impact on local water-system continuity.
Increased pressure on infrastructure that outpaces the capacity to maintain, update and improve aging infrastructure will exacerbate risk unless national and local governments support sufficient infrastructure investment.
Communications
City infrastructure increasingly relies on information and communications technology (ICT) for operation, while critical economic and financial services depend upon online technology. Service providers face the challenge of ensuring infrastructure keeps up with ever-increasing demand.
Communications systems (including social media) can help enhance community empowerment, global education, and contribute to disaster preparedness, response and recovery. However, such benefits are not available to all and in many countries (such as South Africa) fixed broadband access is unaffordable for the majority of the population.
|The role of insurance
To facilitate the pathways for infrastructure resilience, there are a number of areas where Lloyd's believes the insurance industry can work in partnership with other stakeholders. Local insurance markets will have an important role to play in starting meaningful dialogue with governments, businesses, and asset owners, and to take these infrastructure pathways forwards in their own city perspectives.
Lloyd's finds that the insurance sector could take collective action to work with stakeholders and build greater city resilience in 10 areas:
The role of education and shared understanding is fundamental to increasing the resliency of cities. (Photo: Shutterstock)
|1. Improve education & shared understanding
There's a need to understand how all the components and stakeholders of cities interact, and what the key areas and concerns are for each stakeholder. The role of education and shared understanding is fundamental to facilitating action and incentivizing change.
Related: The rise of the chief risk officer
Public and policymaker understanding of risk is critical, and governments, insurers and other stakeholders should work together to ensure there is a greater understanding of the role of all parties in the economic and social consequences of poor risk management, and to allow the development of appropriate solutions.
One way to do this could be to work with a city to develop a proof-of-concept framework that could be tested with the goal of applying the framework at a replicable, worldwide scale.
With improved data collection, city officials may be able to track maintenance, manage responses and model impacts for more integrated decision-making. (Photo: Shutterstock)
|2. Additional data for decision-making
Improved data collection, hazard mapping and other tools to manage and quantify increasing catastrophe risks in underwriting processes will allow more accurate risk based pricing. Additional data collection, tools and research are important to identify future trends and anticipate future risks, as well as to better understand current risks, and the insurance sector is not alone in this.
By using new sources of data, insurers may be able to alert clients of potential losses before they occur, assess damage in real time, speed up the claims process and prevent false claims, reduce administration through automation and allow more personalized products and services to be developed, aiding overall response.
City officials might also be able to track maintenance, manage responses and model impacts for more integrated decision-making. Assigning responsibility at the lowest key stakeholder during multi-stakeholder scenario and response planning could unlock administrative red tape and confusion in the wake of events.
Better risk management could lead to lower pricing, reducing the overall cost to economic growth. (Photo: Shutterstock)
|3. Agreed upon standards and established metrics
Ensuring that metrics, such as those involved in the Sendai Framework for Disaster Risk Reduction, are useful and usable by stakeholders will be key to their uptake. Conversely, the absence of such indices will severely affect the degree to which insurers can actively incorporate resilience into our process given the level of complexity and number of locations involved.
Insurers should work with government to administer policies aimed, for example, at improving construction standards or discouraging building in inappropriate areas. Better risk management could lead to lower pricing, reducing the overall cost to economic growth.
Tools are needed that offer a more transparent and comprehensive approach for analyzing and pricing risk from extreme events. (Photo: Shutterstock)
|4. Develop shared models and tools
There's a need to provide tools that could offer a more transparent and comprehensive approach for analyzing and pricing risk from extreme events. Ensuring that models are developed and maintained in a collaborative way is also an area to consider.
The role of tools and models in informing actions to prevent failure and improve recovery is clear, but their potential role in supporting insurers and decision-makers to support long-term transformation towards improved practice might also be considered.
The insurance industry needs improved data collection, hazard mapping and other tools to assess increasing natural catastrophe risks in its underwriting processes. (Photo: Shutterstock)
|5. Use models to quantify risks
With the increase in the model availability and amount of data available comes the potential to use that information to make assessments about risks and to anticipate the potential impacts of hazards. This would help governments, communities and individuals to make informed decisions about resilience, insurance, investment, and wider policies and interventions.
Models are only as good as the data they are based on, and the insurance industry needs improved data collection, hazard mapping and other tools to assess increasing natural catastrophe risks in its underwriting processes. Improved resilience to some risks is likely to result in more residual risks becoming, or remaining, insurable. This is an area to develop, as increasing resilience in one area can adversely change the resilience of others.
Common building codes that should be applicable after a disaster strikes can encourage a "build back better" system but, at the same time, provide a level playing field for insurers. (Photo: Shutterstock)
|6. Create robust building codes
Infrastructure lasts a long time and risk levels are changing due to many megatrends. Therefore, it's important to create building codes that are robust to both current and future risks.
Common building codes that incorporate resilience provide a level playing field for insurers and other stakeholders and make homes and buildings less vulnerable to the effects of hazards with less need for public or private disaster relief.
When stakeholders can rely on common sets of codes for planning, design, construction and modelling, it's easier to assess and track appropriate metrics to understand critical infrastructure. Common building codes that should be applicable after a disaster strikes can encourage a "build back better" system but, at the same time, provide a level playing field for insurers. If this is only offered as an option within policies it can lead to low take up since premium rates are often higher, as a consequence of the costs of delivering increased resilience.
Underwriters can integrate indices and metrics into their assessment of risk. (Photo: Shutterstock)
|7. Incentivize investment
Finding ways to finance or support investment is a key challenge that often comes back to what information is available, and the way that knowledge is presented and used. The ability to rate the resilience of assets would also be of use on the investment side, and resilience ratings could enable investors to integrate resilience considerations into all aspects of their portfolio management activities.
Underwriters can integrate indices and metrics into their assessment of risk. Ensuring that information is in a useful and usable format will be the key to effective adoption in the risk-assessment process.
This is a complicated area that requires further research and dialogue as there is the potential for short-term moral and ethical questions for those with poor resilience ratings if they become unattractive risks. Yet this process could also help cities in the long-term to understand and communicate their risk and resilience strategies to stakeholders.
One way the insurance industry incentivizes policyholders to introduce risk-mitigation measures where local regulation prevails, is through risk-based premiums for implementing appropriate mitigating actions. (Photo: Shutterstock)
|8. Incentivize resilience
It's in the interest of policyholders and governments to implement risk-mitigation measures, thereby potentially reducing both the damage from natural catastrophes and the cost of insurance. One way the insurance industry incentivizes policyholders to introduce risk-mitigation measures where local regulation prevails, is through risk-based premiums for implementing appropriate mitigating actions.
Another method is for insurers to give policyholders the option to share a greater proportion of the risk through offering policies with higher deductibles. Other things equal, this reduces the costs of insurance but leaves the policyholder exposed to more risk, as such they may they are incentivised to take action to reduce their residual risks.
By offering risk-based premiums to asset owners or managers who have mitigated risk, the premiums would tend to be lower than average, other things being equal. In some cases this could even be made a condition for insurance.
Another option is for policyholders to share a greater proportion of the risk through choosing policies with higher deductibles. This provides a financial incentive for policyholder to implement cost-effective risk-mitigation measures in order to keep losses as low as possible below the full deductible amount. The incentive is also provided in part through savings in insurance premiums in return for them bearing more of the risk.
It's important to note that not every loss is recoverable under an insurance policy or may be a loss inside the deductibles. As such, individuals and businesses may experience resilience benefits if city policymakers and administrators take action to enhance their resilience to events.
The use of remote damage assessment technology, either via satellite or drone aided, is an innovation space that is rapidly developing. (Photo: Shutterstock)
|9. Making change happen at scale
The challenge remains in making change happen at scale — ultimately insurers are competing entities and coverage levels may differ in the approaches taken, so there is real importance in making collaboration happen.
The use of remote damage assessment technology, either via satellite or drone aided, is an innovation space that is rapidly developing, and is an opportunity for action, not only for insurers but all those involved in and responsible for the recovery of cities and communities.
Cities are made up of a diverse and complex mix of institutions, ecosystems, assets and infrastructure that are connected and mutually interdependent. (Photo: Shutterstock)
|10. Find new way to bridge silos for all stakeholders
Truly building resilience for all stakeholders means finding new ways to bridge silos within and between government, the private sector and communities to measure and account for the benefits of resilience (direct and indirect), and to incentivize resilience-building activities.
Cities are made up of a diverse and complex mix of institutions, ecosystems, assets and infrastructure that are connected and mutually interdependent. Disruption to one part of the system — utility and transport networks, communications systems and water supplies, for example — can cause failure in other parts, with far-reaching local and global implications.
This makes assessing city risk extremely challenging — secondary and cascading impacts cannot be predicted through traditional approaches such as spatial risk assessment. The task is made more difficult by the rapid growth and development of infrastructure systems.
Lloyd's and Arup hope this study adds to understanding of city resilience, stimulates new ideas and raises new research questions, and that it can be used to guide all those stakeholders with an interest in ensuring that tomorrow's cities are built on resilient foundations. Continued innovation, reflection and collaboration across sectors and industries are critical to address constraints in support of more resilient, inclusive, prosperous cities.
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