Re/insurance marketplace Lloyd’s has launched a systemic risk scenario that models the global economic impact of extreme weather events leading to food and water shocks, estimating the loss to be around $5 trillion over a five year period.
According to the announcement, the scenario examines how a hypothetical, but plausible increase in extreme weather events that are linked to climate change, could lead to “breadbasket crop failures”, as well as notable global food and water shortages.
Marked as the first in a series of nine systemic risk scenarios, this research has been produced by Lloyd’s Futureset, and in partnership with the Cambridge Centre for Risk Studies, to help risk owners gain a better understanding of their exposure to critical threats such as extreme weather, and role of risk mitigation and insurance protection in order to build out their resilience.
According to Lloyd’s, the scenario is supported by a cutting-edge data tool that provides businesses, governments, and insurers with a data-driven, financial impact assessment of the most significant global threats facing society today.
At the same time, by using Gross Domestic Product (GDP) as its central measurement, Lloyd’s model is able to calculate the global economic loss of a series of extreme weather events leading to a range of food and water shocks.
In addition to the global scenario, the data tool also includes regional analysis which illustrates the potential economic losses should events be focused on a particular region.
However, it is important to note, that the recovery time for individual countries or regions depends on the structure of their economy, exposure levels and resilience.
A key example would be if an extreme event such as this was centred on Greater China, the area which would feel the largest financial impact, it could potentially lead to economic losses of $4.6 trillion over five years.
This is followed very closely by Asia Pacific, sitting at $4.5 trillion.
Moreover, as a percentage share of GDP, the Caribbean would also be impacted the most by an event focused on its shores, ultimately losing 19% of GDP across the five-year period.
It is very clear that this research highlights that there is a major climate risk protection gap, with estimates even suggesting that only a third of the global economic losses caused by extreme weather and climate-related risks are currently insured.
John Neal. CEO of Lloyd’s, commented: “Lloyd’s is committed to building society’s understanding and resilience around systemic risk and protecting our customers against increasing climate threats. It is critical that our market continues to collaborate with the public and private sectors to address this challenge at scale and ensure a sustainable future for all.
“We will continue to use our convening power to support global risk resilience, providing risk transfer solutions to support companies and countries in their transition goals.”
Dr Trevor Maynard, Executive Director of Systemic Risks at the Cambridge Centre for Risk Studies, said: “The global economy is becoming more complex and increasingly subject to systemic threats. We are delighted to work with Lloyd’s, and others, to help businesses and policymakers explore the potential impacts of these scenarios.”
