A collaborative study by Lloyd’s of London and Cambridge University suggests man-made risks like cyber-crime, interstate conflicts and market crashes are a bigger threat to global economic output than natural disasters such as hurricanes, floods, earthquakes and volcanoes.
Lloyd’s City Risk Index, mapping 22 threats across 279 cities – the “key engines of global economic growth” with a total GDP of $35.4 trillion – concluded that man-made events accounted for $320.1 billion of the total $546.5 billion yearly economic output at risk, with natural catastrophes making up $226.4 billion.
This 59% accountability is an emphatic indicator of the current global economic landscape, where financial market crashes are identified as the biggest singular threat to the world’s financial stability, totalling $103.3 billion of potential losses each year.
Rising levels of global geopolitical instability see interstate conflict rank as the second costliest peril with Tokyo, Baghdad, Osaka and Riyadh shouldering over $20 billion of the $80 billion total threat to global GDP.
Climate change is an additional major risk, with climate-related disasters together accounting for $123 billion, a sum expected to grow as extreme weather events become increasingly frequent and severe.
Additionally, the index reports that the 10 highest-GDP cities together face $126.8 billion in potential losses, almost a quarter of the total global figure and more than the total GDP at risk in Africa, the Middle East and Latin America combined. This finding by the study emphasises an increasing concentration of wealth in certain geographic regions and, therefore, the vulnerability of the global economy to disruptive events.
Improved resistance to catastrophe is considered an urgent priority. The index scores each city’s resilience based on criteria such as funding for emergency services and insurance levels. If every city in the index were to improve its resilience to the highest level then risks to global GDP would decrease by as much as $73.4 billion.
Commenting on the study, Bruce Carnegie-Brown, Lloyd’s Chairman, said, “No city will ever be completely risk free. Disruptions will always occur, whether it is the result of a hurricane or a cyber-attack. We have created this unique index to help cities around the world identify, understand and quantify their exposure to risk, which will help them prioritise investments and build resilience.”
“The index shows that investing in resilience – from physical flood defences to digital firewalls and enhanced cybersecurity, combined with insurance – will help significantly reduce the impact of extreme events on cities, improve economic stability and enhance prosperity for all. I urge insurers, governments and businesses to look at the index, and work together to reduce these exposures by building more resilient infrastructure and institutions.”
Academic Director of Cambridge Centre for Risk Studies, at the University of Cambridge Judge Business School, Professor Daniel Ralph, added, “One way of thinking about GDP@Risk is as the money a prudent city needs to put aside each year to cover the cost of risk events.
“Lloyd’s City Risk Index helps governments, businesses and the insurance sector understand the economic implications of a variety of man-made and natural risks, and use the GDP@Risk metric to enhance their preparedness and resilience.”
“One of the most prominent features of the index is the worldwide rise in geopolitical risk, driven in large part by the threat of interstate conflict and civil unrest. We are likely to see this trend continue on a global level,” Ralph concluded.
The huge, potential economic cost of both man-made and natural disasters underlines the need for greater insurance penetration in both developed and emerging markets, as well as a need for greater focus on resilience in order to mitigate the impacts.
