Protecting global economic growth
The world is changing like never before. Businesses and insurers are facing huge challenges as the key drivers of change – globalisation, digitalisation and urbanisation – are quickly changing the nature of global risk and forcing the industry to question existing business models.
Looking at the macroeconomic landscape, the balance of power in the global economy is shifting. Between now and 2025, McKinsey calculates that 440 cities in developing countries will generate nearly half of global GDP growth, and that nearly half of new big businesses – over £1 billion in revenue – will be headquartered in the developing world.
By 2025 São Paulo will have three times as many of these businesses based there as it has today, and Beijing and Istanbul are likely to have twice as many head offices. As these emerging economies begin to realise their true economic potential, their growth is increasingly at risk from natural and manmade threats and, of course, significant economic and geopolitical disruption. These risks are exacerbated by low insurance penetration.
Cities as economic engines
Another important trend is urbanisation. Cities have become the key engines of growth, with a growing concentration of labour, economic capital and physical infrastructure. And their concentration of a country’s economic output is also increasing. For instance London’s share of the UK output increased from 15% in the 1960s to 45% today.
Because cities are now emerging as international hubs of global wealth creation and commercial activity, any impact on their economy would have a direct impact on the country’s economic growth. This is making economies more vulnerable to catastrophic shocks.
Because cities are now emerging as international hubs of global wealth creation and commercial activity, any impact on their economy would have a direct impact on the country’s economic growth. This is making economies more vulnerable to catastrophic shocks.
The digital revolution
New technologies are disrupting traditional business models. Since computers and the internet were invented in the mid-1970s, the world has undergone a significant transition from the physical to the digital, fuelled by what has been called the Digital Revolution, or the Fourth Industrial Revolution.
This surge in the use of digital technologies has driven us forward into an age of unprecedented connectivity. In just 15 years it is expected that there will be 500 billion connected devices, creating a vast "Internet of Things”, and this increasing digital connectivity is fuelling a data boom. According to IBM, every day the world creates 2.5 quintillion bytes of data – so much that 90% of the world’s data has been created in the last two years.
The International Data Corporation estimates that the global data created is doubling every two years, coming from everywhere: smart sensors, GPS systems, financial transactions, internet use, connected devices and of course social media.
In the business arena, the global trend is the increasing movement of assets and infrastructure from the physical to the intangible. The nature of this change is striking when you look at the components of the S&P500 market value, split between tangible and intangible. In 1975 the split was 83% tangible, 17% intangible. Last year we saw that now just 16% of the components of the S&P500 market value are tangible, with 84% intangible.
What’s at stake?
As the world becomes more interconnected and businesses trade globally, their economic exposure is also increasing and systemic shocks can have multiple consequences – one example would be the floods in Thailand causing major business interruption in Japan.
The Lloyd’s City Risk Index 2015-2025 analysed for the first time the potential economic impact of 18 threats on 301 of the world’s leading cities. Lloyd’s worked together with Cambridge University to analyse the effect of both man made threats such as cyber-attack, oil price shock, terrorism and pandemics, as well as traditional physical catastrophes like earthquake, hurricane and flooding on the cities GDP.
The study shows for the first time the true economic cost of these threats and the massive global economic exposure to risks: $4.6 trillion of the forecasted global GDP could be at risk. Globally, all manmade threats together in the study are associated with almost half of total GDP@Risk.
Despite the fact that manmade risks are an increasing concern, emerging threats are also having a growing impact. Cyber-attack, human pandemic, plant epidemic and solar storm represent nearly a quarter of total GDP@Risk globally.
Despite the fact that manmade risks are an increasing concern, emerging threats are also having a growing impact. Cyber-attack, human pandemic, plant epidemic and solar storm represent nearly a quarter of total GDP@Risk globally.
These findings show a need for innovative product development in the insurance industry to protect against these manmade risks.
Building resilience
Building resilience starts long before a catastrophe. In today’s increasingly interconnected global economy we have to pay more attention to the risks threatening our economic engines. We must develop a deep understanding of the impact of severe events in order to develop appropriate risk transfer solutions for growing perils such as cyber-attacks and terrorism. Insurance has a key role to play in helping to mitigate the high cost of these risks when they do occur.
Lloyd’s research shows that a 1% rise in insurance penetration translates into a 13% reduction in uninsured losses – a 22% reduction in taxpayers’ contribution following a disaster. Insurance claims payouts are a key source of capital injection after a catastrophe and aid in the recovery and reduction of the economic costs to governments, business and communities.
But insurance is just one piece of the puzzle. Half of total GDP@Risk can be protected by improving all aspects of cities’ infrastructure and crisis management, underscoring the critical role of governments and businesses.
No municipality or insurer can act alone. Resilience is the collective responsibility of all sectors of society, and we must work together to address the critical threats facing our cities.
By Vincent Vandendael, Chief Commercial Officer at Lloyd’s
By Vincent Vandendael, Chief Commercial Officer at Lloyd’s
