Growing nationalism raises risk of $1tn economic shocks

In its Global Risk Index 2017, the CCRS has identified 22 different types of shocks with the potential to cause economic losses over $1tn. These range from major storms and disease outbreaks to financial crises and wars. According to CCRS analysis, the world is now more likely to see an economic shock over the next three years than was the case two years ago. CCRS found that the ten-year probability-weighted expected loss from the 22 types of shocks is estimated at 1.48% of global domestic production (GDP), higher than its previous ten-year forecast in 2014 of 1.46%. The University of Cambridge unit also found that the short-term risk outlook is higher than the long-term perspective. For the period 2017 to 2019, the percentage of GDP at risk from a major event is 1.51%, or $1.17tn.hide"There is strong evidence that the risk of individual shocks causing [economic] output loss is increasing," said Dr Andrew Coburn, SVP at catastrophe modelling firm RMS, and director of the CRS advisory board. Overall GDP over the next few years is 85% of that predicted in the study two years ago. In 2014 CCRS based its modelling on global GDP reaching $108tn by 2020, but that has been revised down to $92tn. "Overall, risk as the level of potential loss, is reduced with lower levels of economic output," CCRS said in the report. At the same time, CCRS now sees an increase in geopolitical and conflict risk, as well as technology and cyber threats. "The underlying trend driving a lot of the process is the 'post-globalisation' resurgence in nationalism and retreat back from global trade," said Mr Coburn, speaking at the launch of the Global Risk Index 2017 in London this week. GDP at risk from a pandemic has decreased with better vaccines and early warning systems, said Mr Coburn. The overall risk from a financial crash is also reduced, although the risk from property bubbles and mounting debt are increasing. Moves to force banks to hold more capital have helped reduce the risk of contagion from a banking crisis. CCRS said that Italian and other European banks are among those to watch for potential difficulties, but considers the Italian economy too small to cause a major event. CCRS modelled the 22 separate risk scenarios across 300 of the world's largest cities, representing half of global GDP. Such events are, however, rare and unlikely. CCRS does not try to predict how likely such events are, instead the index models probability and severity to produce an 'expected loss' in terms of lost GDP. The team predcits a global economic loss or shock of $1tn every eight years, rising to a $10tn hit to global GDP every 47 years. A one in 100-year loss would be around $16tn, while a one in 200-year return period would produce an estimated economic loss of $22tn. Market crashes were found to have the biggest economic impact, followed by a contained conflict between states - such as a war between Japan and China or Saudi Arabia and Iran. Individual loss scenarios have much bigger exposures than the weighted averages. A conflict between China and Japan, for example, carries an expected global economic loss to GDP of around $17tn. GDP at risk from a global property crash is around $13tn, while a disease outbreak in Brazil is estimated at $7tn and a eurozone meltdown could cost some $11tn. According to Mr Coburn, investment in resilience could reduce around half of the global risk to GDP. Also speaking at the launch event in London, former AIG Europe chief underwriting officer Ashley Hirst called for a deeper, long-term relationship between corporates and insurers to build resilience to these rare but severe events. In particular, Mr Hirst suggested that one-year insurance contracts had "limited effectiveness" in dealing with the impact of catastrophe risks with long return periods. "The prevalence of one-year contracts limits the ability of [insurers and capital markets] to do the things that you might want them to," he said at the event. "You can improve resilience if you have a longer-term insurer-insured relationship. You can't invest in a risk of 600-year return periods in a one-year contract. That is not a coherent approach," he said. Michael Rowe, VP of Corporate Insurance at pharmaceutical company GSK, agreed with Mr Hirst. Also speaking at the CCRS event, Mr Rowe said: "For insurers and corporates to work better we need to move away from annual renewals. We need a common understanding of where the risk is and then decide as a corporation how much we want to play, and how much the insurer wants to play, and where. It is about a risk sharing relationship."

Growing nationalism raises risk of $1tn economic shocks

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