Extreme weather leading to food and water shock

How vulnerable is the global economy to extreme weather and food shocks?

Picture the scene: Extreme weather events and natural disasters linked to the changing climate begin to occur with greater frequency and severity. This series of major weather events leads to a below average crop yield for major producers. The scarcity of staples leads to massive shocks in dependent industries, and an international scramble for supplies.

01: Extreme weather leading to food and water shock

Sunny summers, snowy winters… the idealised vision some might have had of climate change has long since been debunked. Climate change is complex. On top of this, social and economic changes are affecting the impact of heatwaves, freeze, droughts and water loss, windstorms, and more. The impacts of such changes could be substantial, with each inflicting physical damage, economic loss, and social instability in both developed and emerging economies.

Changes in extreme weather events pose a significant threat to us all. Transitioning supporting industries at the pace required has added risks too. These two things happening in parallel need to be managed carefully to ensure the right level of technology (with appropriate research and investment) is in place to facilitate the change.

While global agreements like the Kyoto Protocol in 2005 and Paris Agreement in 2015 – and the rallying calls coming from events like COP27 – suggest world leaders acknowledge the critical threat of climate change, some argue that the public and private sectors are not working fast enough to address this evolving risk, and that without accelerated change, the outlook is worrying.

World food and water systems are also under chronic pressure from global population growth and shifting consumption patterns. The system is vulnerable to acute disruption, due to its globalised and interconnected supply chains. Sudden systemic shocks from catastrophic weather events would cause significant disruption to businesses and communities around the world.

Lloyd’s, as the world’s leading marketplace for commercial, corporate and speciality insurance and reinsurance, is well placed to help organisations manage the most severe impacts of extreme weather and agricultural risks. We can do this by working with clients to build resilience in their businesses and by offering risk transfer solutions for customers as they decarbonise and transform their operations and protect themselves from the short, medium and long-term impacts of climate change.

The Lloyd’s Disaster Risk Facility (DRF) has supported a tailored risk transfer mechanism for the International Federation of Red Cross and Red Crescent Societies (IFRC)’s Disaster Response Emergency Fund (DREF) to ensure that emergency funding is available to support life-saving assistance in vulnerable communities experiencing all kinds of disasters
The Sustainable Markets Initiative Insurance Task Force have launched a Disaster resilience framework for climate-vulnerable countries, to demonstrate the opportunity to blend public and private investment with insurance to reengineer and drastically improve disaster resilience in low- to middle-income countries who are most at risk from climate-exacerbated extreme weather events
Successful government subsidised agriculture schemes underwritten at Lloyd’s include the reinsurance of the Alliance in Partnership (AIP) in the US, which is a protection for multi-peril crop commodity price risk
Zambia’s African Risk Capacity (ARC) drought insurance coverage aims to accelerate relief by providing of cash transfers and food assistance to drought affected and vulnerable communities

Without collaboration, protection and risk mitigation, the potential impacts of extreme and systemic weather events could prove devastating to the global economy. Our ‘Extreme weather leading to food and water shortage’ scenario uses modelling and analysis to expose the potential cost of a weather and food event unfolding over the next five years, at three different levels of severity. The analysis is based on the historic impacts of climate events and uses plausible projections to demonstrate economic and insurance impacts over the next five years.

The scenario we describe is not a prediction; it is an exploration of what might happen based on past events and scientific, social and economic theory.

Picture the scene: A chain reaction of weather leading to food and water shortage

The scenario imagines extreme weather events linked to climate change causing increasingly greater damage and economic loss and accelerating a shift in consumer behaviours and the subsequent response by many sectors.

We assume multiple years of above worst-case economic losses from extreme weather, with an increase in all non-geophysical natural hazard threats associated with extreme weather. The threats include: heatwave, freeze, drought and water stress, flash flood, riverine flood, coastal flood, temperate windstorm, and tropical windstorm.

The events lead to property damage, erosion of key infrastructures, a below average crop yield for major food producers in the US and contributes to disruptions in business continuity and supply chains globally. A combination of these heightened weather events and a simultaneous El Niño-Southern Oscillation (ENSO) warm weather phase further affecting crop fertility contribute to breadbasket failures in the United States.

The initial impact is felt by agricultural entities, who see costs of in-demand fertilizers and pesticides rise sharply. Many farms are not able to access relief capital quickly enough to cope with the impacts. The global agricultural and food supply chain is disrupted, leading to panic buying and price shocks in developed markets and elsewhere. Food supplies are inherently political; and when food is scarce, the geopolitical landscape becomes increasingly tense.

Definitions: Weather and food/water security events occurring in the scenario

Note: The full list of threats modelled in the scenario are listed above

Rising sea levels:

As well as being a threat to the coastal operations of major businesses and infrastructure such as transportation or power plants, rising sea levels can increase the severity of flooding following typhoons, hurricanes, and tsunamis. Businesses, housing and agricultural land previously thought of as safe may find themselves either destroyed after an event or repeatedly suffering damage. Due to the unexpected nature of the event, insurance protections may be inadequate, and losses may not be covered.

Heatwaves:

Extreme heatwaves increase in intensity, making areas previously liveable unfit for human or animal habitation. Periods of intense heat last longer, causing more profound damage to land and water supplies and making it harder, if not impossible, to recover operations during temperate periods. Wider geographies become subject to drought, reducing the opportunity for populations to move towards cooler climates causing significant fatalities among an otherwise fit, economically active demographic.

Freeze:

In parts of the world freeze events last longer, cutting off trade routes and impacting transport and infrastructure. Flights are grounded, airports closed, rail lines reduced to a crawl or closed altogether, and road networks become too dangerous for haulage to navigate. In the worst affected areas, energy supplies are cut off for weeks at a time, affecting business and vulnerable groups of society. There are knock-on effects on food and water supplies impacting an even wider range of businesses and causing overall productivity to fall.

An El Niño-Southern Oscillation (ENSO) warm weather phase:

Night temperatures increase, affecting the fertility of major crop supplies of maize and wheat, which negatively impact the related industries of livestock, sugar refinement, and grocery authority control. High heat and humidity reduce crop production in affected areas. The initial impact is felt by agricultural entities, who see costs of in-demand fertilizers and pesticides affect profit margins. Agricultural insurance is relatively under-developed globally, and thus many farms are not able to access relief capital quickly enough to mitigate the spread of supply chain contagion.

Supply shock:

The supply shock leads to foreign-owned nodes in the agricultural supply chain exporting supply overseas to satisfy local demand for certain cereals and proteins. The disabling of these nodes – major food processors, seed banks, and manufacturers – disrupts the international food supply chain, and reveals its low resilience. This leads to panic buying and price shocks in developed markets and elsewhere. The inevitable reaction of national governments is to supply to their own people as a priority, and then address the global issue. This leads to fractiousness and distrust in the global system, causing a huge effect on recovery and repair following the crisis.

Individually these events can be devastating, impacting several geographies at once. However, in this scenario, the intensity and frequency of events means there is little or no time for businesses to recover. Some regions suffer from several different extreme weather events one after another, or even simultaneously. In areas of drought and experiencing water shortages, we see agricultural losses and significant social disruption as populations vie for limited vital resources. The number of countries able to maintain a sustainable level of food output shrinks dramatically and the global economy contracts at an ever-quickening pace.

The severity of events and measure of impact

The weather element of our five-year scenario is modelled using a baseline that is derived from the last 40 years of historical weather data. The scenario takes mean annual temperatures and assesses climate change-driven financial impacts of extreme weather events. The change in expected frequency and severity of an event is used to quantify the increase or decrease in expected physical risk impacts.

The food and water shock element of the model involves two unique data layers to cover the potential range of impacts. We look at crop yield variation driven by temperature and precipitation changes to support the food shock assessment and we look at a water stress data layer to support the water shock assessment. The threat is assessed using a baseline derived from the last 40 years of historical weather and drought data. We then evaluate the economic loss of an event occurring at the three levels of severity below, major, severe, extreme:

Level	Scenario severity descriptions	Historical reference
Major (1 in 50-year probability)	Multiple extreme weather events occur equating to the worst global loss in the past 40 years, in two consecutive years. The following three years see expected losses globally for extreme weather event. Crop production failures and water stress events increase in both frequency and severity relative to the present day.	None
Severe (1 in 100-year probability)	Extreme weather events occur, equating to 120% of the worst global losses in year one of our scenario and 110% for the next two years, followed by expected losses for the final two years. A major increase in the frequency and severity of crop production failures and water stress events arise, relative to the present day.	None
Extreme (1 in 300-year probability)	Extreme weather events occur, equating to 150% of the worst global losses in year one of the scenario, followed by 120% of the worst losses for the next four years. Catastrophic crop production failures and water stress extremes are widespread globally. Geopolitical action is undertaken to restrict movement of key agricultural supplies.	None

The combined impact from a range of factors, including social and economic changes as well as climate change are increasing the impact of extreme weather. Rising sea levels contribute to worse floods following typhoons, hurricanes, and tsunamis. Heatwaves contribute to more deaths and diminish productivity. Increased development in disaster prone areas leads to greater damage when disaster occurs. The fragility of the global food system has been illustrated through events such as:

– African swine fever (ASF) outbreak (2018 – present): Beginning in 2018, ASF has spread widely through the Asia-Pacific region, where pork provides a crucial source of protein. The viral disease affects pigs and boars, often with a 100% case fatality rate. Following a 2019 outbreak of more than 100 million pigs in China, prices reached a six-year high. As of 2021, the outbreak had contributed to between 1.4-2.07% decline in China’s GDP

– COVID-19 impact on global food supply chains (2020 – 2021): The global lockdown contributed to the labour shortages that revealed the fragility of the global food supply chain. While demand for food was high, sourcing problems caused by staffing issues throughout the chain led to widespread shortages while viable goods were wasted due to tight regulations regarding shipping and saleability. Find out more about global food and drink supply chains in our report From farm to fork: Rethinking food and drink supply chains

– Russia’s invasion of Ukraine (2022 – present): Russia and Ukraine together account for 30% of the world’s wheat exports, with the Black Sea ports being a major conduit for these exports. The conflict in Ukraine has therefore created supply chain disruptions and price increases of wheat, leading to the prospect of further food insecurity for many developing states, such as Lebanon, that depend upon food imports and are agriculturally insufficient. Find out more about the impact of the conflict in Ukraine in our report: Ukraine: A conflict that changed the world

– Pakistan flooding (2022): Extreme rainfall caused devastating flooding and landslides across Pakistan in 2022, submerging a third of the country and affecting 33 million people . 2.1 million homes were totally or partially destroyed, and damage to infrastructure meant more than 5.4 million people were forced to rely on contaminated water from ponds and wells, fuelling outbreaks of water-borne diseases. 9.4 million acres of crop land in Pakistan was flooded, destroying nearly half of the country’s crops and killing over 1.1 million livestock. The impact on food supplies led to a short-term spike in vegetable prices of 500% and the total economic cost of the disaster has been estimated at more than $30 billion

Instability in food supplies in multiple countries contributes to growing political risk, with trade disputes, increased competition and inequality, social unrest, and rising criminality. These factors add to volatility for businesses, with delays affecting third-party relationships, and widespread contingent business interruption. Significant business interruption is felt chiefly in the agricultural and agriculture-adjacent industries, leading to profit shortfalls, and forcing layoffs.

Contingent business interruption subsequently affects additional food related industries, who rely on semi-stable supplies and prices and find themselves in an increasingly competitive food market. Supply chain disruption has second order impacts on other industries as a result of increased political tension; consumer populations are stirred up by rising costs and poor guarantee of supply, while governments enact sweeping trade adjustments and add to growing geopolitical tension over global supply.

Explore the impact of extreme weather leading to food and water shortage

The economic impact

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Reveal the economic impact

The role of insurance

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Additional insight from the scenario

Dig a little deeper into some of the insight from this scenario.

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Disclaimer

This report has been produced by Lloyd's Futureset and Cambridge Centre for Risk Studies for general information purposes only.

While care has been taken in gathering the data and preparing the report Lloyd's and Cambridge Centre for Risk Studies do not, severally or jointly, make any representations or warranties on behalf of themselves or others as to its accuracy or completeness and expressly exclude to the maximum extent permitted by law all those that might otherwise be implied.

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Note that this report does not seek to replace or inform any of the mandatory scenarios which Lloyd’s publishes to support the Realistic Disaster Scenario exercises managing agents are required to undertake in respect of the syndicates managed by them.