Global economic losses from extreme weather could reach $5 trillion

Lloyd's of London, a leading insurance firm, warned on Wednesday that escalating extreme weather events linked to climate change, which could cause crop failure and shortages in food and water, may lead to global economic losses reaching as high as $5 trillion.

Lloyd's, which carried out the research alongside the Cambridge Center for Risk Studies, stressed that its “systemic risk scenario”, which models the global economic impact of extreme weather events, is hypothetical.

However, he assured that the work will improve companies' and policymakers' understanding of their exposure to critical threats such as extreme weather conditions.

Adjusting the estimated $5 trillion in losses over a five-year period to the likelihood of such extreme weather events, the projected global economic losses amounted to $711 billion, according to Lloyd's.

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

Impact

He says the research “will help companies and policymakers explore the possible repercussions of these scenarios.”

Lloyd's modeled global economic losses from extreme weather events by estimating the impact of food and water crises on global Gross Domestic Product over a five-year period.

The weighted average loss in the three severity levels (severe, severe and extreme) was US$5 trillion over five years, from US$3 trillion in the least severe scenario to US$17.6 trillion in the most powerful.

'Systemic threats'

We can apply the complex economic modelling at the regional level as well. For example, the research postulates that an extreme event in Greater China would cause $4.6 trillion in economic losses over five years.

"If an extreme hurricane like something hit the Caribbean, the modeling calculates that it could cause a collective loss of 19 per cent to the region's countries' gross domestic products over a five-year period."

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

Lloyd's research estimates that only a third of the global economic losses that extreme weather and climate-related risks could cause are currently insured, highlighting a gap between insurance and possible economic losses.

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