The information on this page has been provided to help you better understand our scenarios and research methodology. Should you have any further questions, not covered below, please contact us.
futureset@lloyds.comGeneral information
How can scenarios help build resilience?
Scenario narratives provide a useful tool for managing uncertainty, especially in the case of risks that are not well understood or are difficult to quantify. They provide a systematic method for exploring how a complex and diverse array of risks may impact an organisation, sector, or economy; or in other words, how resilient these systems are to potential disruptions.
Scenarios are flexible tools for communication, able to be used in a multitude of ways. They can underpin contingency plan development by being used to support decision making, demonstrate due diligence, and identify biases within an organisation. Scenarios can also help organisations to address uncertainty and produce useable results to factor into high-level decision making.
For risk owners and other bodies, scenarios can help to challenge and question if they can adapt to, and even capitalise on, future changes, and stress their existing capabilities to respond. They can be used in the development of contingency plans and the testing of mitigation strategies, through wargaming exercises and other workshops among senior staff. This understanding can be applied to support and rationalise decision making about the future, and facilitate reporting, management, and mitigation of risks. Scenarios are valued for supporting creative thinking about plausible futures, rather than attempting to accurately predict individual outcomes.
What is a systemic risk?
In this research, we consider 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.
How do the scenarios differ from other scenarios produced by Lloyd's?
This report has been produced by Lloyd's Futureset and Cambridge Centre for Risk Studies for general information purposes only.
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.
Understanding the numbers
How has the modelling been conducted?
Our economic model analyses the exposure to shocks of the global economy against a baseline GDP growth projection. It accounts for potential losses as well as the likelihood of events occurring within a 5-year outlook period.
How have regional and global figures been calculated?
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.
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
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
Glossary of key terms used in the research
While the terminology used in each scenario and its supporting data visualisation are consistent, we’ve pulled together a glossary of key terms to help.
General terms | Description |
| Scenario | The hypothetical event driving losses |
| The model | The method for calculating the cost of the scenario occurring |
| GDP | Gross domestic product |
| Economic loss | The economic loss (of GDP) |
| Severity | The severity level of the event in the scenario |
| Major | Our lowest severity level |
| Severe | Our middle severity level |
| Extreme | Our highest severity level |
| Probability | The likelihood of the scenario occurring in the next five years |
| Global | The loss occurring globally |
| Region | The loss occurring in the region |
| Country | The loss occurring in the country |
| Aggregating model | When the scenario assumes one loss event, and losses aggregate from country level to regional level, to global level |
| Non-aggregating model | When the scenario assumes one global loss, but measures country and regional losses as their own event |
Data definitions | Description |
| Weighted average | The calculated average cost between the three severity levels of the scenario, weighted by probability |
| Expected economic loss | The average economic loss that would be expected (the sum-product of the 5 year economic loss and the probability of the scenario occurring). Also known as "average annual loss". |
| Economic loss percentage | The 5-year economic loss as a percentage of 5-year baseline GDP |
| 5-year economic loss | The 5-year GDP loss given an event has occurred, in $bn (weighted average of the three severities). Also known as "conditional economic loss". |
| 1-year economic loss | The 1-year GDP loss given an event has occurred, in $bn (weighted average of the three severities). Also known as "conditional economic loss". |
Extreme weather leading to a food and water shock | Description |
| Breadbasket crops | Breadbasket crops: The staple crops that feed the world's population; in particular corn, wheat, and rice. |
| El Niño-Southern Oscillation (ENSO) | A climate pattern consisting of an irregular periodic variation in atmospheric pressures, winds and sea surface temperatures over the eastern Pacific Ocean, affecting the climate of much of the tropics and subtropics. The warming phase of the sea temperature is known as El Niño and the cooling phase as La Niña. |
| Temperate windstorms | A general term for destructive storms in temperate regions. |
| Tropical windstorms | A general term for destructive storms in tropical regions including cyclones, hurricanes and typhoons. Tropical windstorms often lead to significant flooding and storm surges while for temperate windstorms, the primary hazard is the high wind speed. |
Visit Downloads pageAcknowledgements
Aggregate GDP from Oxford Economics Global City Service.