Lloyd’s new data tool highlights vulnerability of the global economy to extreme weather

11 Oct 2023

Lloyd’s, the world’s leading marketplace for insurance and reinsurance, today 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 $5trn over a five year period.

The scenario explores how a hypothetical but plausible increase in extreme weather events, linked to climate change, could lead to breadbasket crop* failures and significant global food and water shortages. As the event plays out, societies around the world could see widespread disruption, damage and economic loss, promoting major shifts in geopolitical alignments and consumer behaviours.

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 better understand their exposure to critical threats such as extreme weather, and role of risk mitigation and insurance protection to build their resilience.

It 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 consider the Gross Domestic Product (GDP) impact of extreme events across 107 countries and at three levels of severity (major, severe, and extreme).

In addition to the global scenario, the data tool includes regional analysis which illustrates the potential economic losses should events be focused on a particular region. The recovery time for individual countries or regions depends on the structure of their economy, exposure levels and resilience.

As an example, if an extreme event such as this was centred on Greater China, the area which would feel the largest financial impact, it could lead to economic losses of $4.6 trillion over five years. This is 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 that there is 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.

“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.”

John Neal, CEO of Lloyd’s

“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.”

Dr Trevor Maynard, Executive Director of Systemic Risks at the Cambridge Centre for Risk Studies

Notes to Editors

1. Systemic Risk: Lloyd’s define systemic risk as 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. Among the other systemic risk scenarios modelled in the research are geopolitical conflict, human pandemic and economic stagnation. You can find out more about the threat from extreme weather and food shocks here.

2. Using global Gross Domestic Product (GDP) as its central measurement, Lloyd’s model calculates the global economic loss of a series of extreme weather events leading to food and water shocks as:

$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 $3trn in the lowest severity scenario up to $17.6trn in the most extreme scenario
$711bn is the expected global economic loss (the sum-product of the five-year economic loss and the probability of the event occurring)

3. The scenario severities have been given a probability of occurring in the next five years, based on several risk factors. In the extreme weather events leading to food and water shocks scenario, the probabilities for each severity are: Major 2.29% (1 in 50-year), Severe 1.10% (1 in 100-year), Extreme 0.30% (1 in 300-year).

4. Systemic events can affect individual countries, regions or the entire world at once. This data tool uses two different models to illustrate the economic impact an event could have on gross domestic product (GDP). The core output of the model is a global scenario with ensuing impacts to global GDP. The tool also includes regional models which illustrate levels of loss should the events be focused in that that region alone. Our extreme weather scenario is a non-aggregating scenario, meaning the sum of countries’ economic losses will not equate to total regional or global economic losses.

5. *Lloyd’s define a breadbasket as a key production region for food grains (rice, wheat, corn, and soy)

6. As Chair of the Sustainable Markets Initiative (SMI) Insurance Task Force, Lloyd’s is frequently engaged with governments and international organisations such as the United Nations, driving forward the SMI’s mission of accelerating the achievement of global climate, biodiversity, and Sustainable Development Goal targets.

7. The Lloyd’s market has access to write 80% of the world insurance premium and the systemic risk tool has been created to be reflective of the market’s global access. Regional economic loss figures can be found in the data tool and are summarised in the following table. Contact the media team below for further information on regional losses.

Region	5 Year Economic Loss ($trn)
Africa	1.24
Asia Pacific	4.51
Caribbean	0.12
Europe	3.46
Greater China	4.58
Latin America	1.21
Middle East	1.28
North America	2.46

Enquiries to

pressoffice@lloyds.com

About Futureset

By bringing together diverse perspectives, and through cutting-edge risk insight, intelligence, and cross-industry dialogue on the most complex and fast-changing risks faced by communities, businesses and countries, Lloyd’s Futureset aims to build greater societal understanding and collaboration to find solutions and support greater preparedness, protection, and resilience to the growing and interconnected risks that customers face today, and into the future.

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Lloyd’s is the world’s leading marketplace for insurance and reinsurance. Through the collective intelligence and expertise of the market’s underwriters and brokers, we’re sharing risk to create a braver world.

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