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RAPPORT

Megacities

Pushing the boundaries of our industry.

A recent Allianz publication: The megacity state: The world’s biggest cities shaping our future received widespread recognition. The document gives an insight into how human livelihood will evolve over the next 15 years and touches upon the challenges in risk and insurance, which society will face. In accordance with the United Nations (UN), Allianz defines megacities as urban areas exceeding 10 million inhabitants and describes them as highly interconnected, dynamic and vibrant centers, which will over time contribute higher income and living standards for their citizens.

The growth number for megacities is impressive. A 2006 UN working paper documented that there were only two megacities in 1950, Tokyo and New York City (NYC). The number increased marginally in the following quarter century to three in 1975, Tokyo, NYC and Mexico City.

In contrast, the next 25 years saw a dramatic growth to 18 megacities in 2000. Since then, the digital age has reinforced the pull factor exerted by the megacity and makes it increasingly difficult for demographic experts and governments to extrapolate, forecast and steer the growth. In this respect, the above mentioned 2006 UN working paper predicted 22 megacities in 2015, while in reality the last year recorded 29 megacities – a good 30% above the UN forecast.

Megacities in their enormous size accumulate impressive physical, human and intellectual resources, they increase economies of scale and lower production costs.

A McKinsey study on the megacity’s attractiveness for business foresaw in 2012 that in future years the economic compound annual growth rate (CAGR) of the top 20 megacities will be as high as 7.6%. As such, the cities would outpace the rest of the global economy by almost twice and account for $5.8trn of global gross domestic product (GDP) by 2025.

Research by the World Economic Forum (WEF) verifies McKinsey’s thesis by creating a unique visual (see below) which “...took the entire world’s population and plotted it by density, and [...] superimposed the largest urban archipelagos, the megacities, [...] vis-à-vis the national economy.” As a result, the mapping exercise illustrates that global GDP is much more dependent upon the largest megacities than it is on the world’s 200 sovereign nations. For example, Japan heavily relies on the economic power house Tokyo, and to a smaller extent on Osaka. In South Africa, Johannesburg and Pretoria represent in excess of 35% of the country’s GDP. It is “... the same logic in Lagos — there is practically no Nigeria without Lagos. It applies to Sao Paulo in Brazil, Jakarta in Indonesia, Moscow in Russia, Istanbul in Turkey...”, the WEF concludes.

Evidently, megacities matter today and will do so even more tomorrow. Taking the above mentioned Allianz publication as foundation, this paper intends to examine more deeply the implied challenges, which megacities bring to the insurance industry, and seeks potential solutions to those challenges.

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