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It is estimated that by 2050 more than two thirds of the world’s population will live in cities, up from about 54 percent today. While the many benefits of organized and efficient cities are well understood, we need to recognize that this rapid, often unplanned urbanization brings risks of profound social instability, risks to critical infrastructure, potential water crises and the potential for devastating spread of disease. These risks can only be further exacerbated as this unprecedented transition from rural to urban areas continues.

How effectively these risks can be addressed will increasingly be determined by how well cities are governed. The increased concentration of people, physical assets, infrastructure and economic activities mean that the risks materializing at the city level will have far greater potential to disrupt society than ever before.

Urbanization is by no means bad per se. It brings important benefits for economic, cultural and societal development. Well managed cities are both efficient and effective, enabling economies of scale and network effects while reducing the impact on climate of transportation. As such, an urban model can make economic activity more environmentally-friendly. Further, the proximity and diversity of people can spark innovation and create employment as exchanging ideas breeds new ideas.

But these utopian concepts are threatened by some of the factors driving rapid urbanization. For example, one of the main factors is rural-urban migration, driven by the prospect of greater employment opportunities and the hope of a better life in cities. But rapidly increasing population density can create severe problems, especially if planning efforts are not sufficient to cope with the influx of new inhabitants. The result may, in extreme cases, be widespread poverty. Estimates suggest that 40% of the world’s urban expansion is taking place in slums, exacerbating socio-economic disparities and creating unsanitary conditions that facilitate the spread of disease.

The Global Risks 2015 Report looks at four areas that face particularly daunting challenges in the face of rapid and unplanned urbanization: infrastructure, health, climate change, and social instability. In each of these areas we find new risks that can best be managed or, in some cases, transferred through the mechanism of insurance.

Infrastructure

The quality of a city’s infrastructure is central to the residents’ quality of life, social inclusion and economic opportunities. It also determines the city’s resilience to a number of global risks, in particular environmental, social and health-related risks, but also economic risks such as unemployment. The availability and quality of infrastructure are at the core of many of the challenges faced by rapidly urbanizing cities in developing countries, while underinvestment  is posing similar challenges in most developed economies (WEF data.)

Infrastructure investments in most developed economies are insufficient to maintain the quality of infrastructure (WEF and OECD data): Transportation infrastructure (roads, railroad, airports, ports)

Electric power supply and distribution

Water supply and sewage

Communications infrastructure

This underinvestment is particularly notable in the U.S., UK and Germany.

Infrastructure failure would have significant implications for property and business continuity for city authorities as well as local and central Government bodies. Insurers can help in these areas in terms of risk engineering advice on infrastructure maintenance and also appropriate levels of insurance property damage and business interruption coverage.

As cities expand rapidly, there is a risk that infrastructure will not keep pace with their growth or the increased expectations of their populations. Action is urgently needed to close the infrastructure gap and reduce the potential for risks to have catastrophic cascading effects. The OECD estimates that governments will have to spend approximately USD 71 trillion by 2030 to provide adequate global infrastructure for electricity, road and rail transport, telecommunications, and water.