The economic impact
How vulnerable could you be?
Scenario effects
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.
The economic impact
.png)
If this scenario were to take place, the global economic loss could reach $5.0 trillion over a five-year period (the average loss across the three severities we have modelled), with an expected economic loss (this conditional loss multiplied by the probability of the event occurring) of $710 billion.
Were the least extreme scenario we have modelled to occur; the five-year global economic loss could reach $3.0 trillion. This has been modelled with a 1 in 50-year probability. Under the most extreme scenario (modelled with a 1 in 1,000-year probability) the equivalent economic loss would be $18 trillion.
Recovery
The below graph shows the economic impact across the 5-year period we have modelled. It imagines a crisis point in food and water supplies driven by extreme weather, and regardless of the scenario severity, the economic impacts are extreme. The shock is also seen year over year, as the change in extreme weather increases and food and water security diminish.
Even with a coordinated response and recovery in the ‘major’ and ‘severe’ severity levels, which sees GDP returning to baseline, the global economy will not recover from this combined scenario. Instead, it remains on a shifted baseline trajectory. The speed and scale of recovery from the initial GDP shock (in year one) is dependent on the socio-economic resilience of each country and city.
Recovery from extreme weather events: How quickly the model shows recovery from economic shock is calculated by physical vulnerability to risk, i.e., the quality of buildings and infrastructure. For example, cities of high vulnerability (predominantly weak building stock) suffer high levels of damage during the extreme weather scenario.
Recovery from food and water shock: The model looks at the sectoral composition (agriculture, industrial and food distribution) of a country or region for recovery from food and water shock. These events are assumed to have a milder impact on service-dominated and service-oriented economies as compared to industry and agriculture-oriented economies, which rely more on water for operations.
Regional risks - How exposed could your region be?
Our extreme weather leading to food and water shock model is non-aggregating, meaning that the economic and expected losses calculated for a region and or country represent the impact if an event were to occur in that location (see box below for more details).
If an extreme event such as this was centred on Greater China, it could lead to economic losses of $4.6 trillion. This region is the most exposed in absolute terms to this type of shock, according to our model. This is followed closely by Asia Pacific at $4.5 trillion. As a percentage share of its GDP, the Caribbean would be impacted the most by such an event focused on its region, losing 19% of its GDP across the five-year period, partially driven by the Caribbean’s reliance on US trading volumes and its limited ability to respond without the need for imports.
Use our tool to explore the potential economic loss and expected economic losses by country and or region at the three levels of severity identified in the scenario below.
Systemic events can affect individual countries, regions or the entire world at once. In our analysis of systemic risk, we use two different models to illustrate the economic impact an event could have on gross domestic product (GDP) and the forecasted losses for the insurance industry.
The core output of the model is a global scenario with ensuing impacts to global GDP. We also produce regional scenarios - which illustrate levels of loss should the scenario affect that region alone and also country scenarios which illustrate levels of loss should the events be focused in that country.
An aggregating model: In this model, a systemic event has a significant ‘ripple effect’ of impacts across the globe. The cost of the event is aggregated up from country and regional levels to provide a global economic loss number.
- For example, the COVID-19 pandemic quickly spread around the world, affecting many countries' economies in a significant way, but did so starting from one location with a cascade of impacts globally
A non-aggregating model: Our non-aggregating model is used for events that have a smaller ripple effect and for scenarios where multiple separate events could occur.
- For example, a volcanic eruption is likely to have a much greater impact in the country in which the volcano erupts. In our non-aggregating model, we do not assume that multiple events occur simultaneously across the globe (i.e. multiple major volcanoes erupting at once)
- Country and regional data in a non-aggregating scenario is based on the event occurring in that region and/or country. Therefore in a non-aggregating scenario, the sum of countries’ economic losses will not equate to total regional or global economic losses
Losses in our extreme weather leading to food shock scenario are calculated using a non-aggregating model.
For weather events, we have calculated an economic loss figure at city level and aggregated these to country, region and global levels, ensuring the detail of each sub-threat is fully captured. For the food shock assessment, we have measured the economic impact of drought in areas that expect to see rainfall. Like the weather assessment, the threat is calculated at city level and aggregated to produce our results. The global scenario we have modelled assumes the event arises in the US and has a decreasing weighted impact around the world, depending on trading volumes and ability to respond without the need for imports.
Glossary of terms
Sector risk - which sectors might be most at risk?
In the scenario, all sectors are impacted by climate change and food and water security to varying degrees. Below, we have analysed those most at risk in the model:
.png)
Property
Housing stock and industrial buildings deemed at high risk of extreme weather impacts may lose significant value, becoming un-mortgageable or unsaleable. Property destruction along coastal areas becomes inevitable, as does housing in tornado corridors or plains at risk of flooding. Housing and business parks in regions where there are few public transport links or other more sustainable lifestyle options may also fall out of favour.
Food and drink
A food and water crisis would directly impact the agriculture, industrial and food distribution supply chain causing consumers to struggle to find access to a large variety of foods they are accustomed to. In this instance, we expect to see heavily reduced spending and food price increases which disproportionately affect the poorest societies.
Industrials and energy
In an extreme food and water shortage event, we may see increased political tensions as countries look to maintain food security, which could lead to supply chain and raw material shortages for the industrial sector. Other impacts might include reduced consumer spending and a drop in energy demand. An increased focus on climate may lead to significant changes in consumer behaviours or regulatory change.
Retail
This sector could be hit as extreme weather events force consumers to reassess their purchasing habits and direct them to seek out products with more sustainable credentials. Companies unwilling or unable to reformulate their products in line with acceptable sustainable standards could find themselves deselected, quickly losing market share.
Finance
With more visible and frequent weather events, we may see market corrections away from non-renewable investments, which could cause sizeable losses, impacting investment portfolios and leading to losses in pensions, limiting cash injections for business growth. Banks may see significant losses on their mortgage and lending portfolios where asset values decline.
How can risk owners respond?
While this is a scenario analysis, the risks from an extreme weather and food and water crisis remain present and the list of risks that businesses and individuals need to protect themselves against continues to grow. Organisations should be proactive in seeking to understand the risks impacting their people, assets and supply chains and may look to risk transfer solutions to help mitigate them. Businesses may also look to increase their resilience to this scenario by:
Tackling the problem at source: Being proactive and working to reduce the impact of extreme weather events/working to prevent further climate change. For example, changing the crops to flood resilient seeds and smart irrigation systems. Businesses can improve their own carbon footprint and lobby governments to commit to similar goals, including renewable energy and environmental restoration.
Seek innovative alternatives: Actively reducing reliance on carbon-intensive fuel and seeking new technologies or strategies that lower environmental impact within your own operations or supply chains and that support with global net zero targets may help to mitigate the risk of further climate related damage. For example, using solar powered water pump systems.
Develop rigorous reporting: Sustainability frameworks and measurement may help your business to understand and manage the risk of climate impacts and set you up to support long term resilience.
Seek risk transfer: The greatest impact the insurance industry can have on society is through the risk transfer and mitigation services and expertise we offer to our customers. 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.
Download the key insights
We have consolidated the insight and key financial data from this scenario in a summary takeaway document.
Further risk insights
The role of insurance
Additional insight from the scenario
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.
Lloyd's and Cambridge Centre for Risk Studies accept no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.
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.