Population Growth Creates a World of Mega Cities
Managing the risks of urban shift

As the world's population explodes, more people are gravitating to cities. In 1800, less than 3 percent of the world's population lived in cities, yet by the end of 2008 the number had risen to more than 50 percent, according to Julian Hunt, a visiting professor at Delft University of Technology and vice chairman of Global Legislators Organisation for a Balanced Environment. By 2042, the Population Institute estimates that the world population will top 9 billion. The United Nations projects that by 2050, 67 percent of the world population will be urban, and most of that urban growth will occur in less developed countries. In China alone, 320 million people are expected to migrate from rural areas to cities over the next decade and a half, according to an upcoming book, China's Urban Billion, by Tom Miller, managing editor of China Economic Quarterly.

The urban expansion is driven by several factors:

  • The rural poor are moving in search of jobs.
  • Larger middle and upper classes are emerging in developing nations, and they want and can afford the amenities and higher standard of living available in cities.
  • As modern technologies such as the Internet make the world a smaller, more interconnected planet, people are realizing that they can work wherever they choose. As these people search for the ideal place, cities are starting to compete to attract the smartest, most creative and wealthiest people.

More People and Property in Harm's Way

As city populations swell, risks also increase in several ways. First, many of these cities are in coastal areas, and thus particularly vulnerable to rising sea levels and tropical storms. Second, because more people will be concentrated in smaller areas, disasters like earthquakes and floods have the potential to create much higher losses in human life and property. Third, the concentration of more people in urban centers will bring more infrastructure and environmental stresses, leading to higher numbers of accidents and potential health impacts. And finally, there is a risk that governments will be overwhelmed and unable to keep up with the increased demands for food, water, energy, health care services and transportation.

These risks impact the insurance industry in significant ways. For example, when Bryon Ehrhart, chairman, Aon Benfield Analytics and Aon Benfield Securities, first visited Beijing in 1994, most of the traffic in the city was bicycles. Today, traffic is 95 percent automobiles, he says. "As that kind of shift happens, the amount of premium needed to address the expected automobile losses [goes] from almost nothing to fairly significant numbers."

There are also new, man-made risks, such as terrorist attacks. "The toughest places to buy terrorism insurance are in the big cities," says Rick Miller, chief broking officer, U.S. Property, Aon Risk Solutions.

Already, urbanization is leading to higher probable maximum losses (PMLs) for insurers, which in turn affects the amount of reinsurance required. "Year on year, insurers are seeing incremental 2 to 3 percent growth of their individual PMLs because of continued urbanization," says Ehrhart. And that's a figure that likely has been depressed by the worldwide economic slowdown and housing bust of the past five years.

In short, the bigger and denser the cities, the more property and people are potentially in harm's way. That translates to a large accumulation of risk for insurers, and it becomes even more important to predict, monitor, manage and accurately price those risks.

And that's where a business's risk management partner comes into play. "Aon makes comparisons of those aggregations of risk to the capital and earnings a client has, and when amount of risk in PMLs exceeds the company's tolerance for risk, both in terms of earnings at risk and capital at risk, we devise programs to address the part of the risk that exceeds that tolerance," Ehrhart says. Those programs include not only reinsurance but also the underwriting management plans to help reduce the risk by making certain changes in policies, such as increasing deductibles or co-participations in catastrophe-prone areas.