Tue 16 Jun 2015 – The vulnerability of the overstretched global food system to sudden shocks, and the wide repercussions for communities, businesses and governments was highlighted today by a report published by Lloyd’s, the specialist insurance and reinsurance market. (source: Lloyd’s of London)
The scenario, produced in conjunction with UK and US academics, shows the far-reaching economic and humanitarian consequences that disruptions such as weather catastrophes or plant pandemics – many of which are exacerbated by climate change – could have on the global economy.
The study shows that the impact of El Nino, the spread of a windblown wheat rust in Russia and warmer temperatures in South America could lead to wheat, maize, soybean and rice prices quadrupling. It also suggests that European stock markets could lose 10% of their value and the US stock market fall by 5%. In addition, this series of events has the potential to trigger food riots in urban areas across the Middle East, North Africa and Latin America, leading to wider political instability.
Tom Bolt, Director of Performance Management at Lloyd’s, said:
“Traditionally insurers look only at the financial and physical impact of catastrophes. But in today’s interconnected world, these events can have complex and far-reaching economic and humanitarian implications.
“The insurance industry has a key role to play in improving the resilience of communities, businesses and governments. Our role is not only to ensure that our ability to pay claims helps them to recover quickly from these events, but to ensure they have a greater awareness of the complex risks they face in a globalised world.
“One billion people go hungry every year, and this figure could treble by 2050. We need to close the gap between production and supply to improve food security, protect supply chains, and feed the world’s population. The global food system is under chronic pressure to meet an ever-rising demand, and acute disruptions could lead to a wide range of problems which businesses and societies need to protect against. The effects of these kinds of environmental catastrophes could generate major economic and political impacts, and create a wide range of insurance claims.”
- An executive summary of the report can be downloaded atwww.lloyds.com/foodsystemshocksummary
- The full report can be downloaded at www.lloyds.com/foodsystemshock
- Lloyd’s produced this report to help underwriters operating in the Lloyd’s market identify these previously unconsidered food security impacts on insurance and risk. The scenario described in this report is relevant to stress and scenario testing required under the Solvency II framework: it represents a class of events with a probability thought to be well within the benchmark return period of 1:200 years against which insurers must be resilient.
- Scenarios are not predictions; they explore what might happen based on past events and scientific, social and economic theory. In a world of emerging risk, it is not possible to achieve certainty regarding the nature and scale of threats faced by insurers – as such the insurance industry must be resilient to uncertainty.
- Lloyd’s developed the scenario and its likely impacts with researchers from Anglia Ruskin University, the University of Wisconsin-Madison and Oak Ridge National Laboratory, in conjunction with members of the UK/US Task Force on Resilience of the Global Food Supply Chain to Extreme Events, supported by the UK Foreign and Commonwealth Office.
- A combination of just three catastrophic weather events could could lead to a 10% drop in global maize production, an 11% fall in soybean production, a 7% fall in wheat production and a 7% fall in rice production.
- Wheat, maize and soybean prices could increase to quadruple the average levels experienced during the 20 years prior to the global food price shock of 2007/8. Rice prices could increase by 500%.
- The scenario indicates this series of events has the potential to lead to food riots breaking out in urban areas across the Middle East, North Africa and Latin America, leading to wider political instability and having knock-on effects for a wide range of businesses.
- While agriculture commodity stocks might benefit, the overall economic impact of high food prices, combined with rising political instability, could severely impact financial markets. The scenario indicates that the main European stock markets might lose 10% of their value and US stock markets 5%.
Implications for insurers
- A systemic shock to global food supply could trigger significant claims across multiple classes of insurance, including (but not limited to) terrorism and political violence, political risk, business interruption, marine and aviation, agriculture, product liability and recall, and environmental liability.
- These losses could be compounded by the potential for food system shock to generate losses that span multiple years. The ability of insurers to pay claims quickly would be an important factor in post-shock recovery.
- More broadly, the insurance industry would also be affected by impacts on investment income and the global regulatory and business environment.
- The insurance industry is in a position to make an important contribution to improving the resilience and sustainability of the global food system, by encouraging businesses to think about their exposure to risks throughout the food supply chain, and by providing innovative risk transfer products to enhance global resilience to systemic food system shocks.
- Insurers also need to work with researchers to develop models capable of capturing not only the physical effects of extreme events but also their various economic and social impacts. This is the next step needed to develop insurers’ understanding of complex risks.
Lloyd’s is the world’s only specialist insurance and reinsurance market that offers a unique concentration of expertise and talent, backed by strong financial ratings and international licences. It is often the first to insure new, unusual or complex risks, providing innovative insurance solutions for local, cross border and global risks. Its strength lies in the diversity and expertise of the brokers and managing agents working at Lloyd’s, supported by capital from across the world. In 2015, more than 90 syndicates are underwriting insurance and reinsurance at Lloyd’s, covering all lines of business from more than 200 countries and territories worldwide. Lloyd’s is regulated by the Prudential Regulatory Authority and Financial Conduct Authority.