In a scenario where extreme weather events lead to food and water shocks, Lloyd’s estimates that the world stands to lose $5 trillion over a five-year period.
- Lloyd’s, the marketplace for insurance and reinsurance, has partnered with the Cambridge Centre for Risk Studies to research systemic risk scenarios.
- It is intended to help risk owners better understand their exposure to critical threats as well as the role of risk mitigation and insurance protection in building their resilience.
- The research highlights that there is a significant climate risk protection gap, as only a third of these global economic losses caused by climate-related risks are currently insured.
“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,” said Lloyd’s chief executive John Neal.
“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.”
What is the purpose of this research?
Lloyd’s Futureset has partnered with the Cambridge Centre for Risk Studies to research nine systemic risk scenarios, to help risk owners better understand their exposure to critical threats such as extreme weather, as well as the role of risk mitigation and insurance protection to build their resilience.
This scenario, which is the first to be released, explores how “a hypothetical but plausible” increase in climate change-induced extreme weather events could lead to crop failures of key grains (rice, wheat, corn and soy) and significant global food and water shortages. This, in turn, is expected to cause widespread disruption, damage and economic loss, therefore influencing major shifts in geopolitical alignments and consumer behaviours.
The research is supported by a data tool that provides businesses, governments and insurers with a financial impact assessment of the most significant global threats facing society today, such as the GDP impact of extreme events across 107 countries and at three levels of severity (major, severe, and extreme).
Managing physical and transition risks
Extreme weather events threaten disruption to everyone; from a corporate perspective, transitioning supporting industries at the pace required adds further risks. Respectively, these are called physical and transition risks. According to Lloyd’s, they are happening in parallel and need to be managed carefully, to ensure that the right types of technology are in place to facilitate transformation.
Global food and water systems are already under chronic pressure from population growth and shifting consumption patterns. They are vulnerable to acute disruption, due to their globalised and interconnected supply chains – adding catastrophic weather events would cause significant disruption to businesses and communities around the world.
Different regions face different risk
The data tool includes regional analysis which illustrates the potential economic losses based on where extreme weather may hit. The recovery time for individual countries or regions depends on the structure of their economy, exposure levels and resilience.
For example, Greater China would feel the largest financial impact, with losses of $4.6 trillion over five years, followed closely by Asia Pacific at $4.5 trillion. As a percentage share of GDP, the Caribbean would be impacted the most by an event focused on its shores, losing 19% of GDP across the five-year period.
The research highlights a significant 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 currently insured.
This story suggests different takeaways depending on the sector. Agriculture and the food system as a whole ought to invest in adaptation measures to boost their resilience and make sure that they are insured most effectively against the impacts of climate change.
For the insurance sector, there are both risks and opportunities. On the one hand, it needs to establish plans to evolve in line with the changing climate to avoid exposing itself to major financial losses; on the other hand, the fact that only a third of the estimated $5 trillion losses are insured indicates a major gap in the market that can be filled with the right policies in place.