Definitions of megacities

Some four per cent, or around 280 million people, are living in megacities in 2005. According to United Nations estimates, this figure will rise to 350 million by 2015. Almost one-fifth of gross world product is generated in the world's ten economically most important cities. This development harbours numerous risks for the insurance industry.

Ancient Rome is generally considered to have been the first "megacity" in history. According to estimates, the city already had between 750,000 and 1.5 million inhabitants by the time Christ was born. Even then it was necessary to have complex systems for the distribution of food, supply of water and disposal of waste. For that time, the size of the city was unique and continued to be so for centuries afterwards. Even as late as 1800, urban dwellers accounted for only 3% of the total population.

The history of urbanisation

This changed in the 19th century with the start of industrialisation. Factories were established in cities as these were often conveniently located on rivers or coasts and offered an abundant workforce.

On top of this, there was a large consumer market, proximity to other industrial enterprises and an efficient infrastructure. Around 1900, London was the world's largest city, with more than six million inhabitants. 50 years later its place was taken by New York, with 12 million inhabitants.

Today it is Tokyo, with 35 million. Since then, urbanisation has accelerated dramatically, especially in the newly industrialised and developing countries. There the degree of urbanisation already stands at 40%, while in the industrialised countries it is now 75%. Around three-quarters of megacities are now to be found in countries that are industrially less developed. As the population in developing countries grows very much more quickly than in industrial states, this trend will increase.

What exactly is a megacity?

When is a metropolis a megacity? The United Nations (UN) first coined the term "megacity" to designate urban areas with ten million inhabitants and over. For the insurance industry, the number of inhabitants is only one of many criteria. The presence of high concentrations of values and a modern infrastructure are other key factors. The most important point is that megacities have global influence and are globally interlinked (i.e. they are truly global cities).

For a large part of economic, political and cultural activity takes place in global economic and commercial centres. Indicators for worldwide interdependency are: the number of headquarters of banks, insurance companies and industrial enterprises, the frequency of flights and the presence of international organisations, but also of trading centres like stock exchanges.

Urban regions merge to become megacities

A certain deconcentration can be observed worldwide in major cities. Private households and enterprises are moving to the suburbs. Increasing urban sprawl means that cities grow in area and swallow up industrial regions or airports that were previously outside the city. This process frequently creates large, amalgamated mega-urban regions that do not have just one city centre but encompass several individual cities.

Examples of these regions are the Ruhr area in Germany, the Randstad conurbation in the Netherlands or BosWash on the eastern coast of the USA (stretching from Boston to Washington).

Consequences for the insurance industry: Accumulation risk to the fore

For insurers, the main risk associated with megacities is the particularly high loss potential (accumulation risk) due to the concentration of people and property values in a relatively confined area. Even small events can cause high losses. For example, the breakdown of a central commuter railway line during the morning rush hour in cities like Tokyo, London or New York can lead to total chaos and huge production losses.

Global cities can no longer be viewed in isolation in today's world of global networking. Depending on the degree of networking involved, a business interruption in one metropolis can lead to production losses in other regions or countries although they were not initially affected by the breakdown.

A prime example of this is an earthquake in Tokyo, which according to economic experts could trigger a worldwide recession. Where a disaster also leaves its mark on economic growth and the financial markets, insurers, as major investors in the capital market, are hit twice.