Counting the economic
cost: How vulnerable could
you be?
The economic impact
To help understand the need to prepare for and build societal resilience against infectious diseases, we have sought to estimate the impact this hypothetical scenario could have on businesses and the wider economy across three levels of severity.
Pandemics are, by definition, international. They can be expected to spread through all human communities throughout the world when they occur. The economic impact of a pandemic will vary depending on the severity and reach of the outbreak.
If this human pandemic scenario were to take place today, the global economic impact could, based on our calculations, reach $13.6trn over a five-year period (this represents the probability weighted average across the three severities we have modelled), with an expected loss of $396bn (the economic loss multiplied by the probability of the event occurring).
The global losses across the three severity levels modelled range from $7.3 trillion in the least severe scenario to $41.7 trillion in the most extreme, equivalent to a reduction in global GDP of between 1.1% and 6.4% over the period.
You can use the interactive tool below to explore the potential economic cost of our scenario across the three severity levels.
Recovery
The following chart shows the potential impact and economic loss from our scenario across the 5-year period we have modelled, with the outbreak beginning in 2023.
In all the scenario severity levels, the impact on GDP is most severe in the first year, as virulence tends to be higher at the outset of a pandemic, and in the earlier generations of the virus, before immunity can be built up.
In the lowest severity “major” scenario, the initial economic shock is shorter-lived - lasting two years - due to the disease being a localised epidemic with a low transmission rate. In the “severe” level scenario, the global spread and high transmission rates result in lasting economic effects, with the economy only stabilising to baseline GDP by the end of the five-year period. Under the “extreme” level scenario the economy struggles to return to baseline GDP within the five-year period due to high virulence and fatality rates causing prolonged global disruptions.
Regional risk
How exposed could your region or country be?
How a country recovers from a pandemic depends on its human and animal population densities and proximity, how developed it is - including its access to advanced healthcare and research - and its government’s financial and political ability to take action to prevent the disease’s spread.
While countries can learn lessons from previous disease outbreaks, some studies indicate that countries that have had to tackle epidemics in the past may be at higher risk of severe impacts from future pandemics, due to depleted healthcare resources or strained public health systems[8]. Consequently, regions regularly dealing with epidemics may find themselves ill-prepared when confronted with a new and bigger health threat.
From a regional level North America would be the most financially exposed - on an absolute basis - to this hypothetical scenario, suffering a potential economic loss of $3.2 trillion. Europe could stand to lose up to $3 trillion, and Greater China and Asia Pacific have modelled impacts to GDP of $2.7 trillion and $2.6trillion respectively. When looking at losses relative to the size of a country's economy, certain countries in Africa, South America and South Asia are likely to suffer the greatest financial impact.
Use the tool below to explore the potential impact of the scenario on your region or country, at the three levels of severity modelled in the research.
[8] https://lauder.wharton.upenn.edu/wp-content/uploads/2022/02/Pandemics-in-Africa-GBIR2022.pdf
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 at the same time.
A non-aggregating model: Our non-aggregating model is used for events that have a smaller ripple effect and for scenarios where the global losses are not caused by a trigger event occurring simultaneously in multiple regions.
– For example, a major 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 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.
In our human pandemic scenario, losses are calculated using an aggregating model.
This scenario has been designed and calculated by analysing historical pandemics and their socio-economic impacts.
Our analysis included:
• Establishing a threat assessment grade based on disease virulence in different regions. This was achieved through analysis of past outbreaks and a study of the global distribution of relative risk of an emerging infectious diseases by the Institute of Zoology UK. This study identified locations of past zoonotic outbreaks and locations with dense human populations that have suffered from novel infections from domesticated animals or wildlife.
• Assessing healthcare system vulnerability using the Access to Healthcare Index of the INFORM risk index. This index incorporates factors such as physician density, measles immunisation coverage, and per capita expenditure on healthcare. Comparing this rating to historical World Health Organization data gives a reflection of changes in healthcare quality over time. This vulnerability assessment helps determine how well different regions can manage the health impacts of a pandemic, focusing on recent improvements or deterioration in the healthcare systems.
Economic vulnerability to a pandemic is closely tied to the socio-economic resilience of a population. Regions with good infrastructure, including access to clean water and sanitation, and substantial funding are better equipped to recover more quickly from the initial GDP shock from a pandemic, especially when the virus is at its most virulent and demands on resources are highest.
Our assessment of impact to GDP at each severity level of the scenario is based on a combination of scenario modelling, historical studies, data from COVID-19, and academic expertise. The assessment considers how different regions might manage the initial impacts of a pandemic, such as productivity losses due to government lockdowns and increased absenteeism in the workplaces, and the long-term economic impacts of a pandemic, such as supply chain disruptions and reductions in consumer demand, and the increased government expenditure required for emergency response and health care.
Sector risk
Which sectors might be most at risk?
Hospitality and tourism
Foreign holidays and all international travel, including aviation, rail and maritime cruises, are all at significant risk from a pandemic and subsequent lockdowns. Even in the early days of the COVID-19 pandemic, several airlines including Virgin Australia and the UK’s Flybe collapsed, as well as other travel companies including Shearings coach holidays, Europe’s largest coach operator9.
Retail
Consumer spending is likely to be heavily influenced by a pandemic, largely due to job losses and economic insecurity or intermittent stockpiling in case of supply chain issues. At the peak of the COVID-19 pandemic, job losses were a regular occurrence globally. In the UK alone, 725,000 people lost their jobs10 and consumer habits shifted to buying cheaper goods or delaying major purchases due to reduced disposable income, with sources suggesting households spent £100 a week less on discretionary items during the 2020 lockdowns11. The transition to working from home led to an almost immediate double-digit drop in spending on cosmetics12, while retailers reported a similar dip in office wear13.
Food industry
If the pandemic is zoonotic in origin, a wholesale cull of animals could result in scarcity and higher prices. In 1989, the UK Government banned the consumption of beef offal due to the identification of bovine spongiform encephalopathy (BSE, also known as "mad cow disease") in British cattle and its human equivalent variant Creutzfeldt–Jakob disease (vCJD). By 1996 there was a ban on UK exports of beef and beef products, lasting three and a half years.14 Public fear and misinformation could also trigger shifts in consumer behaviour, leading to the avoidance of specific foods. This was the case during the H1N1 virus, labelled 'swine flu,' where consumer avoidance of pig products resulted in a $1.1 billion loss for the pork industry.15
Investments
A lack of certainty about when normality will return, and which sectors will see extended impacts, could mean that companies hold back investing in major capital projects, resulting in a slowdown in long-term economic growth. Business investments fell a quarter to June 2020 because of the COVID-19 pandemic, with investment in transport machinery falling by half.16
Healthcare
Some areas of healthcare could naturally see a significant leap in demand, such as the need for increased volumes of personal protective equipment (PPE), heightened demand for doctors and nurses, and even the need for ‘field hospitals’ to cope with overflow from existing capacity. This pressure can expose healthcare procurement systems to expensive failures.
[9] https://www.starttravel.co.uk/blog/travel-firms-that-have-gone-bust
[10] https://www.bankofengland.co.uk/knowledgebank/how-has-the-covid-19-pandemic-affected-jobs
[11] https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/articles/weeklyhouseholdspendingfellbymorethan100onaverageduringthecoronaviruspandemic/2021-09-13
[12] https://www.jpmorgan.com/solutions/cib/research/covid-spending-habits
[13] https://www.dailymail.co.uk/news/article-9937201/Marks-Spencer-stops-stocking-suits-Sales-tailored-office-wear-fall-72.html
[14] https://www.centerforfoodsafety.org/issues/1040/mad-cow-disease/timeline-mad-cow-disease-outbreaks
[15] https://abcnews.go.com/Business/pork-industry-reeling-swine-flu/story?id=8840004#:~:text=The%20United%20States%2C%20the%20world%27s%20largest%20pork%20exporter%2C,of%20H1N1%2C%22%20pork%20council%20spokesman%20Dave%20Warner%20said.
[16] https://blog.ons.gov.uk/2020/10/14/prosperity-postponed-how-businesses-have-cut-investment-through-the-pandemic/
How can risk owners respond?
COVID-19 taught us many pandemic response lessons, and these will invariably inform any response to future outbreaks. Many communities now have an established pattern of behaviours to revert to, including remote working, social distancing, and self-isolation, that may help mitigate impacts in the future.
Prepare: Businesses should develop comprehensive emergency continuity plans in preparation for future outbreaks. These plans should establish logistics for remote or hybrid work, online-only sales and operations, and include intervals for reassessing the situation, drawing on recent insights to update guidance. A well-structured plan will allow the organisation to react quickly to future lockdowns if needed, helping to halt the spread of disease and limiting any collateral damage to the business.
Contingency plans: For companies where working from home is not an option, contingencies are needed to mitigate potential business interruptions. This could involve determining the minimum number of employees required to keep operations running and planning how the business can function with these reduced staffing levels. Business may need to develop plans for operating on a skeleton crew or adapt their business model to accommodate the changing circumstances.
Communicate: Employers increasingly have a duty to help their employees understand the changing environment and what it means for them, both from a health and welfare perspective. Studies have shown that employees who felt like their employers kept them safe at the workplace during the COVID-19 pandemic were more engaged, more productive, and less likely to leave a company.[17] Strong communication is vital for the success of any pandemic plan and will help maintain the trust and resilience of employees to ensure they can operate under tough conditions.
[17] https://hbr.org/2022/05/prepare-your-company-for-the-next-covid-wave
Download the key insights
We have consolidated the insight and key financial data from this scenario in a summary takeaway document.
Explore the impact of an infectious disease outbreak
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.