Climate change losses will continue to grow, Lloyd's warns

Climate change risks account for around one fifth of potential lost GDP covered by the 2018 Lloyd's City Risk Index, produced in conjunction with the Centre for Risk Studies at Cambridge University. The most severe risks connected to climate change tracked by the report are tropical windstorms and flooding, which account for $62.6bn and $42.9bn of total tracked risk respectively.

Average global GDP at risk from the threats tracked by the report now exceeds $540bn, or 1.54% of world GDP 2018, up from 1.48% of world GDP at risk in the 2017 report. This figure is not a 'worst case' economic loss, but rather combines the size of losses with their likelihoods to arrive at an estimated annual loss.

The report groups threats into five 'classes': natural catastrophes; financial, economics and trade; technology and space; geopolitics and security; and health and humanity. Of these, natural catastrophes accounted for the highest overall loss value. However, geopolitics and security risks have grown more rapidly than other threat classes in recent years, with a 40% increase since 2015. This category includes risks such as interstate conflict, civil conflict, terrorism and social unrest.

The report tracks the potential impact of these threats on the world's largest 279 cities, which together account for 41% of global GDP. Of those, the 10 cities with the highest exposure together account for $127bn worth of potential loss, or almost a quarter of the total. Many of the cities facing the greatest losses, such as Tokyo and London, are also labelled the most "resilient" by the report. However, if every city in the world were to improve its resilience to "very strong", global risk would reduce by $73.4bn, according to the report.

"The Lloyd's City Risk Index 2018, which has evolved since its first launch in 2015, is important for insurers and their underwriters in – at least attempting to – understand what the future risk landscape may look like," said insurance law expert Elaine Quinn of Pinsent Masons, the law firm behind Out-Law.com.

"It is clear that resilience needs to develop in the market around climate-related risk in particular. The report confirms these risks are likely to increase in frequency and severity - in 2017, we witnessed some of the highest insured losses ever from natural catastrophe events. Although much climate-related risk today remains uninsured, growing awareness and pressure means we are seeing the industry really waking up and paying attention, both to its role in closing the protection gap and to its responsibility in proactively mitigating climate change impacts where possible," she said.

Taken together, man-made risks remain a bigger threat to global economic output than natural disasters, accounting for $320.1bn, or 59% of the total, according to the report. Market crash is the top threat tracked by the report, putting $103.33bn of total GDP at risk; followed by interstate conflict, under which $80bn of total GDP is at risk. Cyber crime is now the 7th most serious threat, putting $36.54bn of global GDP at risk.

The report highlights the role that insurance can play in providing "cash injection following a catastrophic event, allowing cities to rebuild and recover more quickly". It also recommends that insurers and brokers "invest in developing new products", particularly in relation to difficult-to-quantify man-made risks.

However, Lloyd's chair Bruce Carnegie-Brown stressed that cities should also be investing in resilience measures, as well as effective insurance cover.

"The index shows that investing in resilience – from physical flood defences to digital firewalls and enhanced cyber security, combined with insurance – will help significantly reduce the impact of extreme events on cities, improve economic stability and enhance prosperity for all," he said. "I urge insurers, governments and businesses to look at the index, and work together to reduce these exposures by building more resilient infrastructure and institutions."

Pinsent Masons recently commissioned a report which aims to help trustees understand the practical steps they can take to engage with climate risk in ways which are appropriate and proportionate for their respective schemes. Although it was prepared with the specific interests of pension trustees in mind, its findings will also be of interest, and useful, for the wider financial services audience, including insurers.