Lloyd’s of London and less-than-catastrophic risk

fortyeridania14 Jun 2017 2:49 UTC
2 points
7 comments2 min readLW linkArchive

I recently found that Lloyd’s has a number of interesting resources on risk. One is the City Risk Index, the methodology for which comes from Cambridge’s Judge Business School.

The key metric is something they call GDP@Risk. Despite the name, it is not simply an application of Value@Risk to GDP. Instead, it is simply the sum of the expected damage from a given threat (or from a set of threats) during a given time period. In this case, the time period is 2015-2015. The threats considered include manmade ones (e.g., cyber attack, oil price shock) and natural ones (e.g., drought, solar storm). The site includes brief case studies for the threats. For example, the “plant epidemic” study focuses on the demise of the Gros Michel banana:

Event: Panama disease outbreak, 1950s

Location: Latin America

Economic cost: Estimated losses across Latin America were around $400m ($2.3bn today) although this figure does not include any of the economic losses caused by unemployment, abandoned villages and unrealised income in the affected region.

Description: The Fusarium oxysporum cubense fungus was first diagnosed in Panama but quickly travelled across Central America.

Damage: The disease wiped out the Gros Michel banana, the principal cultivar at the time, from plantations across the region. Between 1940 and 1960, around 30,000 hectares of Gros Michel plantations were lost in the Ulua Valley of Honduras, and in a decade 10,000 hectares were lost in Suriname and the Quepos area of Costa Rica.

Insight: Gros Michel was replaced in the 1960s by Cavendish, a variety thought to be resistant to the disease. However, a new strain of the pathogen was found to be attacking Cavendish plantations in Southeast Asia in the early 1990s. It has since spread, destroying tens of thousands of hectares across Indonesia and Malaysia, and costing more than $400m in the Philippines alone. There is concern that it could reach Central America and destroy up to 85% of the world’s banana crop. Solutions to contain the disease could include increasing genetic diversity among banana cultivars and developing hybrid varieties with stronger resistance.

As the name implies, the site quantifies risks from these threats at the city level. So which cities are the most at risk from a plant epidemic? They’re all in APAC:

  • Hong Kong ($3.83b)

  • Shanghai ($2.89b)

  • Beijing ($2.38b)

  • Bangkok ($2.22b)

  • Jakarta ($2.09b)

These account for 1⁄6 of the plant-epidemic risk across all 301 cities ($75b).

Which cities are the most “at risk,” all threats considered? Once again, APAC dominates, but with a different set of cities:

  • Taipei

  • Tokyo

  • Seoul

  • Manila

  • New York (not APAC of course)

This kind of information is interesting. It may even be useful as an approximate indication of where to focus risk mitigation efforts. But without more detail (probability distributions? second-order interaction effects? etc.) it’s hard to see what role it would play in a serious risk analysis, existential or commercial or otherwise.

Coda: Despite their application to less-than-existential risks and the superficiality of this particular resource (it is a marketing tool for Lloyd’s, after all), perhaps existential riskologists could benefit from looking at the insurance industry. Has this already been done?

fortyeridania14 Jun 2017 2:49 UTC
2 points
7 comments2 min readLW linkArchive