Lloyd’s has unveiled a systemic risk scenario that models the potential worldwide economic fallout resulting from extreme weather events leading to food and water shocks. The estimated loss over a five-year span, as per the model, stands at a staggering $5 trillion.
This scenario delves into a hypothetical yet plausible uptick in extreme weather events, intimately tied to the climate change narrative, that could trigger crop failures in vital agricultural regions, subsequently causing severe global shortages of food and water. As the scenario unfolds, it paints a grim picture of widespread disruption, damage, and substantial economic losses. This, in turn, could spark profound shifts in geopolitical alignments and consumer behaviours.
This research is the inaugural instalment in a series of nine systemic risk scenarios and has been meticulously crafted by Lloyd’s Futureset in collaboration with the Cambridge Centre for Risk Studies. Its objective is to empower risk owners with a profound understanding of their exposure to critical threats, such as extreme weather, while highlighting the pivotal role of risk mitigation and insurance protection in bolstering resilience.
The initiative is supported by an innovative data tool providing businesses, governments, and insurers with a data-driven financial impact assessment of the most critical global threats confronting society today. It considers the gross domestic product (GDP) impact of extreme events across 107 countries, categorised by three levels of severity: major, severe, and extreme.
In addition to the global outlook, the data tool features regional analyses, shedding light on potential economic losses in case events are regionally concentrated. The recovery period for individual countries or regions is contingent on their economic structure, exposure levels, and overall resilience.
For instance, if an extreme event of this nature were to focus on Greater China, the area would experience the most significant financial impact, resulting in economic losses of $4.6 trillion over five years. Asia Pacific would closely follow, facing losses of $4.5 trillion. In terms of a percentage share of GDP, the Caribbean would bear the brunt if an event were to focus on its shores, translating to a 19% loss of GDP over the five-year period.
The research underscores a substantial climate risk protection gap, with estimates suggesting that only a third of the global economic losses caused by extreme weather and climate-related risks are presently insured.
Lloyd’s CEO John Neal said that the market will continue to use its convening power to support global risk resilience for both companies and countries.
“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,” Neal 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,” Cambridge Centre for Risk Studies systemic risks executive director Dr Trevor Maynard said.
What are your thoughts on this story? Please feel free to share your comments below.
