Man-made risks forecast to cost world’s cities $320bn each year on average
Man-made risks like cyber-crime, interstate conflicts or market crashes are a bigger threat to economic output than natural disasters such as hurricanes, floods, earthquakes and volcanoes, putting an estimated $320.1 billion of global GDP at risk on average each year, according to Lloyd’s, the world’s specialist insurance and reinsurance market.
The Lloyd’s City Risk Index, built in collaboration with Cambridge University, is a unique study measuring the impact of 22 threats on 279 cities’ projected economic output.
The index reveals that 279 cities across the world – the key engines of global economic growth with a combined gross domestic product (GDP) of $35.4 trillion – risk losing on average $546.5bn in economic output annually (GDP@Risk) from all 22 threats. This comprises $320.1bn to man-made risks and $226.4bn to natural catastrophes.
The key trends identified by the index are:
- Man-made threats are on the rise: Man-made threats account for 59% of all global GDP@Risk. Financial market crash is identified as the biggest threat to the global economy, putting on average $103.3bn in global economic output at risk per year. Reflecting the rising level of geopolitical instability around the world, the study indicates that interstate conflict is the second costliest peril – totalling $80.0bn in GDP@Risk.
- Climate change is still a major risk driver: Climate-related risks together account for $123.0bn of GDP@Risk, and this sum is expected to grow as extreme weather events become increasingly frequent and severe. The costliest climate events are windstorms which account for $66.3bn of GDP@Risk and flood that puts a further $42.9bn of economic output at risk.
- The majority of risk is concentrated in a few cities: The 10 cities with the highest GDP@Risk together face $126.8bn in potential losses to economic output each year. This is almost a quarter of total GDP@Risk and more than the amount of GDP@Risk in Africa, the Middle East and Latin America combined. This finding reflects the increasing concentration of wealth in certain geographic regions and, therefore, the vulnerability of the global economy to disruptive events.
- Building resilience is 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 global GDP@Risk would decrease by as much as $73.4bn.
Extreme events are rare but costly when they do take place. To reflect this fact, the index averages out these large losses to produce an annual average loss estimate – GDP@Risk.
However, the actual losses from an extreme event in any given year could be much higher than this. An illustration is provided by Los Angeles where, according to the index, the average annual loss estimate for an earthquake is $2.7bn GDP@Risk. However, according to the index, in an extreme scenario an earthquake in Los Angeles could cause the city to lose as much as $380.4bn of GDP.
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.Lloyd’s Chairman, Bruce Carnegie-Brown
The index shows that investing in resilience – from physical flood defences to digital firewalls and enhanced cyber security, 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.”
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.Professor Daniel Ralph, Academic Director of Cambridge Centre for Risk Studies, at the University of Cambridge Judge Business School
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.
Lloyd's City Risk Index
- Lloyd’s City Risk Index is the product of a research partnership between Lloyd’s and the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School. To view the index, visit https://cityriskindex.lloyds.com/
- The 22 risks measured by the index are:
- Man-made: power outage, nuclear accident, commodity price shock, social unrest, civil conflict, cyber-attack, terrorism, interstate conflict, sovereign default, market crash.
- Natural: heatwave, solar storm, freeze, tropical windstorm, temperate windstorm, drought, flood, earthquake, tsunami, volcano, plant epidemic, human pandemic.
- The first Lloyd’s City Risk Index was launched in 2015. For 2018, the methodology has been updated which means it is not possible to meaningfully compare data between the two indices.
- The 2018 index includes three new risks: interstate conflict, civil conflict and social unrest to reflect the threat these pose to economies around the world. Windstorm is split into temperate and tropical storms. Oil price shock becomes commodity price shock.
- The 2018 index also groups some contiguous cities together into metropolitan areas, so whilst there are fewer individual city units than in the 2015 index - 279 versus 301 - the total population remains broadly the same and they still represent the same amount of GDP output.
- The index shows how much economic output (GDP) a city would lose on average annually as a consequence of various types of rare risk events that might only take place once every few years, such as an earthquake, or from more frequently occurring events such as cyber-attacks.
- GDP@Risk is an average annual loss estimate – in other words it is a projection based on the likelihood of the loss of economic output from the threat. The resilience levels of each city are taken into account, including the city’s governance, social coherence, access to capital and the state of its infrastructure. If a city is very resilient it can expect to have lower losses.
- Using the GDP@Risk figure, the index gives an estimate of the average annual loss to the economy of each city, from each risk. Extreme risks are very rare. An earthquake, for example, does not happen every year, but when it does it can cause a very large loss. The index, therefore, averages out these large losses to produce an annual average loss estimate. This average annual loss is equivalent to the amount that a city would need to put aside each year to replace these losses to their economy in the long run. Additionally, when a major catastrophe occurs, the economic disruption normally lasts for several years. For this reason, the index counts all the multi-year losses into the average annual loss estimate.
Lloyd’s is the world’s specialist insurance and reinsurance market. With expertise earned over centuries, Lloyd’s is the foundation of the insurance industry and the future of it. Led by expert underwriters and brokers in more than 200 territories, the Lloyd’s market develops the essential, complex and critical insurance needed to underwrite human progress. Backed by diverse global capital and excellent financial ratings, Lloyd’s works with a global network of over 4,000 insurance professionals to grow the insured world – building resilience for businesses and local communities, and strengthening economic growth around the world.
About Cambridge Centre for Risk Studies
Cambridge Centre for Risk Studies is a multidisciplinary centre of excellence for the study of the management of economic and societal risks, and is an independent research centre at the University of Cambridge Judge Business School. The Centre’s focus on the analysis, assessment and mitigation of global vulnerabilities for the advancement of business risk managers, individual decision-makers and policy strategists. The research programme pursued by the Centre explores catastrophic systemic risk and interconnectivity in the economy. The Centre is supported by the business community as well as the academic research councils and focuses on research that is highly application-oriented.