Insurance Giant Lloyd’s of London is maybe the only “Reinsurance” company that most people have probably heard of.
These are the Insurance Companies that insure Insurance companies. So, yeah, more money than God.
Lloyd’s has warned in the past about impending risks to insurers from rising climate damages. They have developed a new scenario looking at possible consequences “hypothetical” extreme impact climate events, with some sobering numbers.
Lloyd’s, the world’s leading marketplace for insurance and reinsurance, today launched a systemic risk scenario that models the global economic impact of extreme weather events leading to food and water shocks, estimating the loss to be $5trn over a five year period.
The scenario explores how a hypothetical but plausible increase in extreme weather events, linked to climate change, could lead to breadbasket crop* failures and significant global food and water shortages. As the event plays out, societies around the world could see widespread disruption, damage and economic loss, promoting major shifts in geopolitical alignments and consumer behaviours.
–
1. Systemic Risk: Lloyd’s define 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. Among the other systemic risk scenarios modelled in the research are geopolitical conflict, human pandemic and economic stagnation. You can find out more about the threat from extreme weather and food shocks here.
2. Using global Gross Domestic Product (GDP) as its central measurement, Lloyd’s model calculates the global economic loss of a series of extreme weather events leading to food and water shocks as:
- $5trn is the global economic loss over a five-year period (the weighted average across the three severities we have modelled)
- The global economic loss ranges from $3trn in the lowest severity scenario up to $17.6trn in the most extreme scenario
- $711bn is the expected global economic loss (the sum-product of the five-year economic loss and the probability of the event occurring)
3. The scenario severities have been given a probability of occurring in the next five years, based on several risk factors. In the extreme weather events leading to food and water shocks scenario, the probabilities for each severity are: Major 2.29% (1 in 50-year), Severe 1.10% (1 in 100-year), Extreme 0.30% (1 in 300-year).
4. Systemic events can affect individual countries, regions or the entire world at once. This data tool uses two different models to illustrate the economic impact an event could have on gross domestic product (GDP). The core output of the model is a global scenario with ensuing impacts to global GDP. The tool also includes regional models which illustrate levels of loss should the events be focused in that that region alone. Our extreme weather scenario is a non-aggregating scenario, meaning the sum of countries’ economic losses will not equate to total regional or global economic losses.
5. *Lloyd’s define a breadbasket as a key production region for food grains (rice, wheat, corn, and soy)
6. As Chair of the Sustainable Markets Initiative (SMI) Insurance Task Force, Lloyd’s is frequently engaged with governments and international organisations such as the United Nations, driving forward the SMI’s mission of accelerating the achievement of global climate, biodiversity, and Sustainable Development Goal targets.
7. The Lloyd’s market has access to write 80% of the world insurance premium and the systemic risk tool has been created to be reflective of the market’s global access. Regional economic loss figures can be found in the data tool and are summarised in the following table. Contact the media team below for further information on regional losses.
Lloyd’s has warned insurance prices in Europe will have to rise over the next two years as the industry responds to events such as this summer’s wildfires. Returns should improve in parallel. But premiums cannot rise indefinitely as the world heats up. Investors across multiple sectors are underpricing climate risks, Lex argues. The insurance sector is a prime case study.
Some — but not all — insurers and reinsurers have yet to include climate change in their stress testing. Floods, wildfires and other climate-linked weather events accounted for on average 56 per cent of total insured losses across the industry between 2018 and 2022, according to Moody’s Investors Service.
Catastrophe losses have been above average for six years. This has resulted in five-year average returns on equity for reinsurers fluttering around a paltry 5 per cent for the past three years, the lowest levels in more than a decade.
