Lloyd’s geopolitical conflict scenario sees global economy exposed to $14.5tn loss

1. A systemic risk is a low likelihood, high impact risk which affects either a systemically important global enterprise or multiple sectors, societies, or national economies. They can be global in impact, often hitting billions of people simultaneously. Other risk scenarios explored in the research include: cyber attack, extreme weather events leading to food and water shock and economic stagnation.

2. Produced in partnership with the Cambridge Centre for Risk Studies, the research explores eight hypothetical but plausible systemic risk scenarios and is complimented by an interactive data tool that allows users to reveal the potential economic and insurance impact of each scenario across 107 countries and at three levels of severity (major, severe and extreme).

3. Using global Gross Domestic Product (GDP) as its central measurement, Lloyd’s and Cambridge model calculates the global economic loss of a geopolitical conflict scenario as:

• $14.5trn is the global economic loss over a five-year period (the weighted average across the three severities we have modelled)
• The global economic loss ranges from $7.8trn in the lowest severity scenario up to $50trn in the most extreme scenario

4. The scenario severities have been given a probability of occurring in the next five years, based on several risk factors.

5. Examples of the types of insurance designed to mitigate these economic impacts include:

• Political risk insurance: Assets and funds located in politically volatile regions can be vulnerable in the event of unrest. Political risk insurance provides protection against losses from government actions like expropriation, currency inconvertibility, confiscation, contract breaches, and political violence. 
• Credit insurance: Political unrest can give rise to frozen funds, asset seizures and shipment delays, which may result in non-payment or non-fulfilment of contracts by trade partners or suppliers. Today, credit insurance stands behind over $3 trillion of global trade from losses due to non-payment of commercial debt, helping businesses protect their capital and cash flow.
• Contingent business interruption (CBI) insurance: Businesses inevitably rely on other companies for raw materials, components, or products. If a supplier is unable to provide goods and services on time due to events such as geopolitical conflict, it creates a knock-on effect down the supply chain, especially if alternative suppliers are unavailable. CBI insurance protects businesses from costs associated with declining turnover, loss of profit, and accrued charges caused by disruptions from third-party suppliers or customers, which impact the business’s ability to produce products or deliver services as usual.
• Marine & Aviation insurance: War risk coverage is an exclusion that can be added back into aviation or marine policies to cover losses due to grounded planes or rerouted shipping and items lost in transit or damaged cargo. Following the outbreak of hostilities, collaborative initiatives between governments, NGOs and insurance have the power to tackle some of the resulting pressures on global supply chains. For example, the Black Sea Grain Initiative brokered by the United Nations created a safe trade corridor for commercial food and fertilizer exports from Ukrainian ports, allowing Lloyd’s to provide insurance through Marsh’s 'As One' Marine Cargo and War Facility. This was succeeded by the Unity Facility which today provides affordable war insurance for food, fertilizer and all other non-military cargo.