(Pdalo) Information System Indexing Disaster Losses

Pacific Damage and Loss (PDaLo) Information System

Indexing Disaster Losses

Anna Rios Wilks

AUGUST 2013

SPC SOPAC PUBLISHED REPORT (PR189) Important Notice

This report has been produced with the financial assistance of the European Union. The views expressed herein do not necessarily reflect the official opinion of the European Union.

Indexing Disaster Losses

Anna Rios Wilks

AUGUST 2013

SPC SOPAC PUBLISHED REPORT (PR189) Pacific Damage and Loss (PDaLo) Information System

Table of Contents

PURPOSE...... 2 REPORTING LOSSES OVER TIME...... 2

AN EXAMPLE OF INDEXING LOSSES IN PICs...... 3 Methodology and Data...... 3

Recorded Events...... 3

Nominal versus Indexed Losses...... 4

Individual Country Losses...... 5

Marshall Islands...... 6

Samoa...... 6

Solomon Islands...... 7

Tonga...... 7

Vanuatu...... 8

USING INDEXING FOR POLICY DECISIONS...... 9

CONCLUDING RECOMENDATIONS...... 9

SOURCES...... 10

Indexing Disaster losses Pacific Damage and Loss (PDaLo) Information System

LIST OF FIGURES

Figure 1: Increase in recorded losses due to natural hazard events in Pacific Island Countries.... 2 Figure 2: Frequency of events...... 3 Figure 3: Population affected by hazard...... 4 Figure 4: Fatalities...... 4 Figure 5: Losses over time...... 5 Figure 6: Total losses - Marshall Islands...... 6 Figure 7: Total losses - Samoa...... 6 Figure 8: Total losses - Solomon Islands...... 7 Figure 9: Total losses - Tonga...... 7 Figure 10: Total losses - Vanuatu...... 8

LIST OF TABLES

Table 1: Summary of country events...... 5 Table 2: Total country losses for cyclones and earthquakes (1979-2009)...... 8 Table 3: Average annual country costs...... 9

ACRONYMS

PDaLo Pacific Disaster and Loss PIC Pacific Island Country DRM Disaster Risk Management

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Pacific Damage and Loss (PDaLo) Information System

PURPOSE

The Pacific Disaster and Loss (PDalo) information system is an online database founded on the DesInventar methodology which holds data on natural hazard events occuring in the Pacific region over the last 500 years1. Cook (2013) shows the importance of natural hazard loss data for the Pacific Island Countries (PICs) and the versatility of the DesInventar system in the analysis of this data.

The PDaLo system reports losses2 in nominal terms, (often called current monetary terms or currency) from the year in which the natural hazard event occurred. Although this is common practice, it is important that these nominal values are transformed into constant (comparable) monetary terms before they are compared or aggregated by an analyst.

This document presents the use of indexing to understand the true pattern of natural hazard costs over time. It also aims to promote the use of indexing when quantifying the cost of natural hazard events in the PICs to better inform policy and decision making. As an example, the recorded costs of historic natural hazard events in five Pacific Island Countries will demonstrate the importance of indexing.

REPORTING LOSSES OVER TIME

When losses arise because of a natural hazard event, they are reported in monetary units. This can be the local currency of the country in which the natural hazard event occurred or, equally commonly, in terms of the United States dollar currency (US$) so that the costs produced by an event can be communicated to the international community in a standard currency and can better allocate funds to the country’s disaster management efforts, if required.

Monetary units are nominal units; their real value changes over time. This is because the real value of any currency will change over time: the real value of a one dollar note today is different from the real value of a one dollar note 50 years ago, even though its nominal value of one dollar has not changed. For example, many of us might notice that the nominal value (the money price) that we paid for the same food we ate ten years ago, such as a bag of rice or a kilo of bananas, was different (often less) than the price we pay for the exact same items today. Prices in most countries seem to gradually increase each year, which makes the real (or ‘true’) value of their currency decrease because, for the same nominal value (a note or a coin), people cannot buy as much.

Consequently, if we look at losses from natural hazard events that wereIndexing recorded PDaLo in nominal Information values (monetary System terms), they may appear to increase over time. Figure 1 shows recorded losses over the 20th century for the 25 PICs included in the PDaLo data system. Figure 1: Increase in recorded losses due to natural hazard events in Pacific Island

CountriesFigure 1: Increase in recorded losses due to natural hazard events in Pacific Island Countries. Losses over 4me

3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Losses (thousand USD)

YEAR Year 1 The PDaLo information system is a living database which constantly evolves over time. This report is based on data accessed on 20th September 2013. This trend of increasing losses is partially due to there being more natural hazard events and 2 For the purpose of this document, the term “losses” refers to the value of all damages and costs that have been recorded due coststo anrecorded event. and the fact that nations may have more assets that are damaged by a natural hazard event. However, this trend is also seen because, in most countries, the price levels (nominal value of currency) increase over time. Nevertheless, this does not mean that 2 Indexing Disaster losses the real value of losses incurred due to natural hazard events in the past was any smaller than that of today.

Consequently, when costs are measured in monetary units such as US dollars, care must be taken if the values of costs are to be compared or aggregated across time periods. The fact that price levels or the 'nominal values' of a currency change over time requires that the value of losses incurred in different time periods should be converted to a common point in time (e.g. all measured using the price level of a single year) if we are to compare them across time. Otherwise, we are at risk of misinterpreting the true magnitude of the costs recorded. This may be most simply approached by ‘indexing’3.

For example; the US $100 thousand loss recorded for Vanuatu after Tropical Cyclone Eric in 1985 does not have the same real value as the 100 thousand dollar loss recorded for Vanuatu after Tropical Cyclone Ivy in 1989. If the US $100 thousand loss from 1985 is indexed to 1989 prices, its value becomes over US $115 thousand. We can then state that the real value of the losses recorded for Cyclone Eric is higher than that for Cyclone Ivy.

3 The method of indexing employs these changes in the price level (the inflation rate) in order to transform the nominal value of losses incurred in different years into their nominal value in one specific year.

Pacific Damage and Loss (PDaLo) Information System

This trend of increasing losses is partially due to there being more natural hazard events and costs recorded and the fact that nations may have more assets that are damaged by a natural hazard event. However, this trend is also seen because, in most countries, the price levels (nominal value of currency) increase over time. Nevertheless, this does not mean that the real value of losses incurred due to natural hazard events in the past was any smaller than that of today.

Consequently, when costs are measured in monetary units such as US dollars, care must be taken if the values of costs are to be compared or aggregated across time periods. The fact that price levels or the ‘nominal values’ of a currency change over time requires that the value of losses incurred in different time periods should be converted to a common point in time (e.g. all measured using the price level of a single year) if we are to compare them across time. Otherwise, we are at risk of misinterpreting the true magnitude of the costs recorded. This may be most simply approached by ‘indexing’3.

AN EXAMPLE OF INDEXING LOSSES IN PICs

An analysis of the nominal and indexed losses4 incurred in 5 PICs explains the necessary use of indexing in the analysis of historical data.

Methodology and Data This analysis employs the PDaLo data on recorded losses between the 31 years of 1979 and 2009 inclusive, focusing on: • 5 PICs: the Marshall Islands, Samoa, the Solomon Islands, Tonga and Vanuatu. • 2 types of natural hazard events: tropical cyclones and earthquakes.

Recorded Events In the 31 years between 1979 and 2009, a total of 145 earthquake and tropical cyclone events were recorded for the 5 countries. Tropical cyclones are more frequent, making up about three quarters of these events (Figure 2).

Figure 2: Frequency of events

events 1979 − 2007

26% 37 earthquake events

108 tropical cyclone events

74%

4 For the purpose of this document, the term “indexed losses” refers to losses that have been transformed into a constant price level. The term “nominal losses” refers to losses which are valued in the price level of the year the event took place.

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Pacific Damage and Loss (PDaLo) Information System

These events had serious implications for the populations, causing a total of 556 deaths and affecting 1,788,671 people. The vast majority of those affected by these events were affected by tropical cyclones (Figure 3).

Figure 3: Population affected by hazard

Population affected 1979 − 2007

76,075 affected by earthquakes

1,712,596 affected by tropical cyclones

96%

Although the number of earthquakes and number of people affected by them is far lower than those of tropical cyclones, earthquakes were nevertheless responsible for almost two thirds of the total fatalities associated with these events (Figure 4).

Figure 4: Fatalities

deaths 1979 − 2007

40% 331 earthquake related deaths

225 tropical cyclone related deaths

60%

These events also resulted in costs which were reported in monetary terms. The next section demonstrates the difference between reporting these monetary losses in nominal or indexed terms.

Nominal versus Indexed Losses Reported losses associated with tropical cyclones and earthquakes in the five PICs were sourced from PDaLo5. Aggregating nominal losses over time, the cost of cyclones and earthquakes in the five countries from 1979 would appear to be in the vicinity of US $1.95 billion. By comparison, indexing the losses to 2012 values6 reveals that the real costs of these natural hazard events over the time period are, in fact, closer to US $2.80 billion. This demonstrates how describing the natural hazard losses which occurred in different years, using the currency from those different years may lead to miss-interpretation of their value when they are aggregated or compared over time.

5 The losses in PDaLo are only those which have been actually reported and consequently they serve as a minimum estimate of the total loss that the hazard event generated. 6 When informing policy makers of losses, it is most useful to transform values into the current price level. The latest available annual inflation data is for 2012 which gives a fair indication of the value of losses in today’s prices.

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Indexing PDaLo Information System Pacific Damage and Loss (PDaLo) Information System demonstrates how describing the natural hazard losses which occurred in different years, using the currency from those different years may lead to miss-interpretation of their value when they are aggregated or compared over time. It can be seen that indexing historic losses to a present day price level (or a more recent year) will increase their Itvalue can (Figure be seen 5). that indexing historic losses to a present day price level (or a more recent year) will increase their value (Figure 5). Figure 5: Losses over time Figure 5: Losses over time

Losses 1979 -‐ 2009 1,000,000 900,000 800,000 700,000 600,000 500,000 nominal loss (thousand USD) 400,000

Thousand USD Thousand indexed loss (thousand USD) 300,000 200,000 100,000 0

Year

IndividualIndividual Country Country Losses Losses The earthquake and cyclone events suffered between 1979 and 2009 in the five countries areThe summarizedearthquake and below. cyclone events suffered between 1979 and 2009 in the five countries are summarized below. Table 1: Summary of country events Table 1: Summary of country events Tropical Deaths from Affected Earthquake Deaths from Affected by CountryCountry Earthquakcyclonee Tropic al Deaths Dtropicaleaths from Affected by Affbyec tropicalted events earthquake earthquake events eventscycl one from trocyclonepical earthquake by cyclonetropica l Marshall events earthquake cyclone cyclone 0 9 0 1 0 20,300 IslandsMarshall Islands 0 9 0 1 0 20,300 SamoaSamoa 3 3 9 9 146 146 30 30 32,00032,000 286,367286,367 Solomon 13 21 54 109 12,000 486,415 IslandsSolomon Islands 13 21 54 109 12,000 486,415 TongaTonga 3 3 20 20 9 9 10 10 1,0001,000 330,386330,386 VanuatuVanuatu 18 18 49 49 122 122 75 75 31,07531,075 589,128589,128

Once these events are broken down into the country level, it is possible to show the amount Once these events are broken down into the country level, it is possible to show the amount by which national bypolicy which makers national would undervaluepolicy makers their historicalwould undervaluelosses from earthquakes their historical and tropical losses cyclones from earthquakes if indexing of andlosses tropical was not cyclones conducted if beforeindexing their ofaggregation. losses was not conducted before their aggregation. Marshall Islands

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Pacific Damage and Loss (PDaLo) Information System

Marshall Islands Between the years 1979 and 2009, the Marshall Islands recorded 9 tropical cyclones. Aggregating the nominal losses associated with these events over time, total recorded losses are in the vicinity of US $87 million, compared to US $126 million if losses are indexed to 2012 prices (Figure 6).

Figure 6: Total losses - Marshall Islands

marShaLL ISLanDS

125,756,152 total loss indexed to 2012 (USD)

38,956,152 value of underestimate (USD)

86,80 0,000 total loss without indexing (USD)

Samoa Between 1979 and 2009, Samoa recorded 3 earthquakes and 9 tropical cyclones. Aggregating the nominal losses associated with these events over time, total recorded losses are around US $463 million, compared to US $735 million if losses are indexed to 2012 prices (Figure 7).

Figure 7: Total losses - Samoa

Samoa

735,218,615 total loss indexed to 2012 (USD)

272,078,615 value of underestimate (USD)

463,140,000 total loss without indexing (USD)

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Pacific Damage and Loss (PDaLo) Information System

Solomon Islands Between 1979 and 2009, the Solomon Islands recorded 13 earthquakes and 21 tropical cyclones. Aggregating the nominal losses associated with these events over time, total recorded losses are in the vicinity of US $36 million, compared to US $68 million if losses are indexed to 2012 prices (Figure 8).

Figure 8: Total losses - Solomon Islands

SoLomon ISLanDS

67,780,288 total loss indexed to 2012 (USD)

32,210,288 value of underestimate (USD)

35,570,000 total loss without indexing (USD)

Tonga Between 1979 and 2009, Tonga recorded 3 earthquakes and 20 tropical cyclones. Aggregating the nominal losses associated with these events over time, total recorded losses are around US $99 million, compared to US $154 million if losses are indexed to 2012 prices (Figure 9).

Figure 9: Total losses - Tonga

tonga

154,124,686 total loss indexed to 2012 (USD)

54,779,686 value of underestimate (USD)

99,345,000 total loss without indexing (USD)

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Pacific Damage and Loss (PDaLo) Information System

Vanuatu Between 1979 and 2009, Vanuatu recorded 18 earthquakes and 49 tropical cyclones. Aggregating the nominal losses associated with these events over time, total recorded losses are in the vicinity of US $1.3 billion, compared to US $1.7 billion if losses are indexed to 2012 prices (Figure 10).

Figure 10: Total losses - Vanuatu

vanuatu

1,719,864,327 total loss indexed to 2012 (USD)

451,401,406 value of underestimate (USD)

1,268,462,921 total loss without indexing (USD)

In light of these findings, it would appear that — for five PICs over this 30-year period — the shortfall in using nominal (un-indexed) natural hazard event losses is over US $800 million (Table 2).

Table 2: Total country losses for cyclones and earthquakes (1979-2009)

Country Total losses Total losses Undervaluation Undervaluation without indexing indexed to 2012 (USD) as a % of total (USD) (USD) indexed losses Marshall Islands 86,800,000 125,756,152 38,956,152 31% Samoa 463,140,000 735,218,615 272,078,615 37% Solomon Islands 35,570,000 67,780,288 32,210,288 48% Tonga 99,345,000 154,124,686 54,779,686 36% Vanuatu 1,268,462,921 1,719,864,327 451,401,406 26% Total 1,953,317,921 2,802,744,068 849,426,147 30%

Table 2 above demonstrates that, by using the non-indexed values, total losses are underestimated by 35 per cent, on average. This means that the non-indexed total losses recorded in PDaLo would on average need to be multiplied by a factor of over 1.5 (one and a half times larger) in order to be truly representative of the total losses incurred. In fact, in the case of the Solomon Islands above, the non-indexed losses would need to be almost doubled.

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Pacific Damage and Loss (PDaLo) Information System

USING INDEXING FOR POLICY DECISIONS

From the above examples, it should be clear that manipulation of loss data over time should only be tackled using data that has been indexed to a common point in time. Aggregation of un-indexed losses over time will cause biases in the cost of historical events, usually understating7 losses incurred in the past. As another example of this, Table 3 summarises average annual losses in the same five PICs for cyclones and earthquakes over the 31-year period. It can be seen that the underestimation of losses is significant.

Table 3: Average annual country costs

Country Average annual Average annual Average annual undervaluation losses without losses indexed to undervaluation as a % of total indexing (USD) 2012 (USD) (USD) indexed losses Marshall Islands 2,800,000 4,056,650 1,256,650 31% Samoa 14,940,000 23,716,730 8,776,730 37% Solomon Islands 1,147,419 2,186,461 1,039,042 48% Tonga 3,204,677 4,971,764 1,767,087 36% Vanuatu 40,918,159 55,479,494 14,561,336 26% Total 63,010,255 90,411,099 27,400,845 30%

If historical losses are used as an indication of future expected losses then underestimating these values could have far-reaching implications. For example, if governments underestimate the future losses they expect from natural hazards then they are likely to assign fewer funds to Disaster Risk Management (DRM) in their annual budgets. This may lead to governments being required to reallocate funds from other important sectors to DRM activities after a natural hazard event if the cost exceeds the DRM allowance given in the annual budget. The reallocation of funds away from other sectors produces a waste of government resources when projects must be cut off before their completion. It is also often the case that the first projects to be cut are those which are of less need in the immediate term, but are no less important in the long term, such as economic development and higher education. Consequently, natural hazard events will not only affect the short term but may imply slower development in the longer term.

CONCLUDING RECOMENDATIONS

This report has briefly demonstrated the importance of indexing natural hazard event loss values to one specific time period before these losses can be compared or aggregated over time. The use of loss data plays a key role in policy decisions and DRM. Consequently, it is vital that the analysis of losses does not misinterpret historical values through a failure to index values to constant terms.

As PDaLo continues to develop and improve its service to users, it is suggested that the PDaLo system incorporate a facility which allows the automated indexing of losses in its analysis functions.

5 This assumes that price levels have increased over time (that inflation has been positive).

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Pacific Damage and Loss (PDaLo) Information System

SOURCES

Cook (2013) Pacific Damage and Loss (PDaLo) Regional Disaster Impact Report. SPC SOPAC PUBLISHED REPORT (PR180)

Pacific Damage and Loss (PDaLo) Information System. Accessed at 20/09/2013: www.pdalo.net

World Data Bank (2013) Accessed online October 2013: (http://databank.worldbank.org/data/views/ variableselection/selectvariables.aspx#)

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Pacific Damage and Loss (PDaLo) Information System