Lloyd’s systemic risk scenario reveals that volcanic eruption could cost the global economy $1.6 trillion

23 May 2024

Lloyd’s research and insights platform, Futureset, has today published its fourth systemic risk scenario, modelling the hypothetical but plausible impacts of an explosive volcanic eruption on global GDP across a five-year period.

If the scenario were to take place, the global economic impact could reach $1.6 trn over a five-year period, calculated as the average of three potential severity levels (explained below), with an expected loss - taking into account the likelihood of the scenario occurring - of $14bn.

While major volcanic events are relatively rare, the risks they pose are very real. Any lack of attentiveness from the global communities to geological warning signs could leave populations and economies unprepared for the immediate and persistent fallout caused by eruptions.

As part of its series exploring the second and third order effects of systemic events, Lloyd’s latest scenario, developed in partnership with Cambridge Centre for Risk Studies, explores the potentially catastrophic consequences of volcanic activity.

The scenario is informed by five historic volcanic events - from the 1991 eruption of Mount Pinatubo in the Philippines to the 2022 eruption of Hunga Tonga–Hunga Haʻapai.

Analysis shows that while the immediate impacts of a volcanic eruption, including business interruption, environmental damage, property loss and loss of life carry significant implications for a community, they are isolated geographically.

The indirect effects from an eruption may have greater global implications. From supply chain disruption to a decline in workforce availability, to longer-term impacts in the most severe cases such as damaged productivity and consumer confidence, instabilities in global food availability and increased geopolitical tensions.

The research then highlights the key role insurance could play in times of uncertainty, including supporting widespread collaboration on pre-emptive, cross-sectoral measures that can mitigate and build preparedness in the face of volcanic risk.

Read the full scenario

Explore the global economic impact on GDP

Each scenario in Lloyd's systemic risk analysis is supported by a cutting-edge data tool that models the exposure to shocks of the global economy against a baseline GDP growth projection. Each scenario considers severity level, major to extreme and the conditional expected loss (the calculated average cost between the three severity levels of the scenario, weighted by probability) The tool allows users to filter by geography also.

Go to the insights hub

Understanding the severities and loss numbers

The scenario explores the potential likelihood and severity of volcanic eruptions in proximity to 277 cities around the world, across three severity levels.

Major	Volcanic eruption 5cm ash layer: Ash cloud covers local area to 5cm depth, resulting in a lengthy recovery.	2010 Eyjafjallajökull eruption
Severe	Volcanic eruption 1 meter ash layer: Ash cloud covers local area to a deeper 1m depth, resulting in a more complex recovery– potentially with longer timeframe.	79 CE Pompeii eruption
Extreme	Volcanic winter: A caldera creating explosion contributes to a 2 meter ash coverage. This is followed by a volcanic winter, which contributes to increased rainfall, flooding, and crop failures. The recovery time is considerable, with potential long-term impacts on global temperatures.	1815 Mount Tambora eruption

The global losses across the three severity levels modelled range from $1.3 trn in the least severe scenario to $4.8 trn in the most extreme, equivalent to a reduction in global GDP of between 0.2% and 0.7% over the period. In the scenario, the most impacted countries are Japan, China and the United States.