Extreme weather events could cost global economy $5tn

Economic modelling by Lloyd's of London shows catastrophic food and water shocks would be triggered by extreme weather

The economic modelling takes hypothetical extreme weather event and predicts how the scenarios might play out across the global economy. Bloomberg

New economic modelling by the world's leading insurance market, Lloyd's of London, has shown extreme weather events that lead to food and water supply shocks could cost the global economy $5 trillion over a five-year period.

The modelling takes hypothetical extreme, but plausible, weather events, such as severe drought or flooding, and predicts how the scenarios might play out across the global economy and how the damage and crop loss would promote significant shifts in geopolitics and consumer behaviour.

The research was carried out by Lloyd’s Futureset, in partnership with the Cambridge Centre for Risk Studies, and aims to help businesses, governments and insurers understand how exposed they are to the risks of extreme weather events linked to climate change.

The $5 trillion is an average cost across three levels of severity for an extreme event, which range from $3 trillion for the lowest severity to $17.6 trillion for the most extreme weather calamity.

Within the modelling, the weather events are ranked by the probability of them occurring, with a major event having a once-in-50-year chance of happening, a severe event a once-in-100-year chance and an extreme event a once-in-300-year probability.

“Lloyd’s is committed to building society’s understanding and resilience around systemic risk and protecting our customers against increasing climate threats,” said John Neal, chief executive at Lloyd’s.

“It is critical that our market continues to collaborate with the public and private sectors to address this challenge at scale and ensure a sustainable future for all.”

'Systemic threats'

The complex economic modelling can be applied at the regional level as well.

For example, the research postulates that if an extreme event occurred in Greater China, it would lead to $4.6 trillion in economic losses over five years.

If something like an extreme hurricane hit the Caribbean, the modelling calculates that countries in the region could collectively lose 19 per cent of their gross domestic products over a five-year period.

“The global economy is becoming more complex and increasingly subject to systemic threats,” said Trevor Maynard, executive director of Systemic Risks at the Cambridge Centre for Risk Studies.

The Lloyd's research highlights a gap between insurance and possible economic losses, because it is estimated that only a third of the global economic losses that could be caused by extreme weather and climate-related risks are currently insured.