Emerging Risk Report | Food System Shock: the Insurance Impacts Of
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Emerging Risk Report – 2015 Innovation Series SOCIETY & SECURITY Food System Shock The insurance impacts of acute disruption to global food supply Disclaimer This report has been produced by Lloyd’s and the contributing authors for general information purposes only. While care has been taken in gathering the data and preparing the report, Lloyd’s does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. Lloyd’s accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind. © Lloyd’s 2015 All rights reserved Key contacts Trevor Maynard – Exposure Management +44 (0)20 7327 6141 [email protected] For general enquiries about this report and Lloyd’s work on emerging risks, please contact [email protected] Lloyd’s Emerging Risk Report – 2015 Contents Executive summary 02 Introduction 05 Part 1: Food system shock 07 Part 2: Global crop production shock scenario 09 Summary 10 The scenario 12 Alternative responses 16 Part 3: Key conclusions of insurance practitioner workshops 18 Wider impacts and key conclusions 24 References 25 Lloyd’s Emerging Risk Report – 2015 Food System Shock 02 Executive summary The ability of the global food system to achieve food Lloyd’s commissioned the development of a scenario security is under significant pressure. of extreme shock to global food production in order to explore the implications for insurance and risk. Global demand for food is on the rise, driven by unprecedented growth in the world’s population and Experts in the field of food security and the widespread shifts in consumption patterns as countries economics of sustainable development were asked develop. The Food and Agriculture Organization (FAO) to develop a scenario describing a plausible, relatively projects that global agricultural production will need to severe production shock affecting multiple agricultural more than double by 2050 to close the gap between food commodities and regions, and to describe the cascade supply and demand.1 As this chronic pressure increases, of events that could result. the food system is becoming increasingly vulnerable to acute shocks. The systemic production shock to the world’s staple food crops described in the scenario generates There is a pressing need to reduce the uncertainty widespread economic, political and social impacts. surrounding the impacts of an extreme shock to the food supply. There are uncertainties in the scenario, arising from the difficulty of obtaining key data, the applicability Sudden disruptions to the supply chain could reduce of historical data to modern food trade networks, the global food supply and trigger a spike in food prices, and the uncertainty surrounding future impacts of leading to substantial knock-on effects for businesses climate change. However, the scenario provides a and societies. The food system’s existing vulnerability robust tool to allow these uncertainties to be explored, to systemic shocks is being exacerbated by factors such and to begin to think about the possible implications as climate change, water stress, ongoing globalisation, of a global food shock for the insurance industry. and heightening political instability. Lloyd’s Emerging Risk Report – 2015 Food System Shock 03 A shock to the global food supply could trigger Scenarios are an important method of exploring significant claims across multiple classes of insurance, emerging risks; they are not predictions or forecasts. including (but not limited to) terrorism and political violence, political risk, business interruption, marine and The following scenario is simply one of a multitude of aviation, agriculture, environmental liability, and product events that could occur. When the scenario considers liability and recall. These losses could be compounded actions or events by individual governments or by the potential for a food system shock to last for many individuals within specific countries, it is not stating years; and the ability of insurers to pay claims quickly that Lloyd’s is predicting that the events will occur. is expected to be an important factor in post-shock Many of the comments are based on events that have recovery. More broadly, the insurance industry may also occurred in the past – either in the countries mentioned be affected by impacts on investment income and the or extrapolated from other regions. However, individual global regulatory and business environment. countries are only named specifically to give realism to the event and allow appropriately detailed calculations to be made – events could occur in different countries The insurance industry is in a position to or not at all, and to illustrate this some alternative make an important contribution to improving the scenarios are provided. Lloyd’s firmly believes that the resilience and sustainability of the global food system. insurance industry will be stronger by considering a variety of scenarios around mega-risks, and the only way As businesses become increasingly aware of the threat to do this consistently is to give sufficient detail. This posed by food system disruption, they may invest more has long been the approach within the Lloyd’s Realistic heavily in comprehensive risk transfer structures, and a Disaster Scenario process. Lloyd’s has chosen to share severe shock could motivate individuals and businesses this work openly because it believes that a debate within to address gaps in their risk management. As such, the insurance industry, and beyond, will strengthen the global food supply shock could also represent a global community. substantial opportunity for insurers, who will have a key role in assisting clients to understand their risk exposure and to tailor appropriate risk transfer solutions. Lloyd’s Emerging Risk Report – 2015 Lloyd’s Emerging Risk Report – 2015 Food System Shock 05 Introduction Modern society depends on interconnected food systems that are global in reach and designed to harness a multiplicity of complex supply chains. These systems have delivered significant benefits, but they also face major threats to their sustainability. Following our report on the issue of global food security (Feast or Famine, Lloyd’s, 2013), Lloyd’s commissioned the development of a scenario for plausible shock events in order to explore the implications for insurance and risk. Experts in the fields of food security and the economics of sustainable development were asked to develop a plausible scenario of a global production shock to some of the world’s staple food crops, and to describe the cascade of impacts that could result. The scenario was developed in conjunction with members of the UK/US Task Force on Resilience of the Global Food Supply Chain to Extreme Events, which is supported by the UK Foreign and Commonwealth Office. The scenario was peer-reviewed by a diverse group of leading academics before being presented to insurance industry practitioners for assessment at two workshops. This report presents one plausible scenario and the findings of the workshops. It aims to reveal some of the complex risk factors that exist in the modern food system, and to present initial findings on the role that insurance could play in managing those risks. Lloyd’s Emerging Risk Report – 2015 Lloyd’s Emerging Risk Report – 2015 Food System Shock 07 Part 1: Food system shock Agriculture is the single largest employer in the world, As the pressure on our global food supply rises, so providing livelihoods and jobs for 40% of the world’s too does its vulnerability to sudden acute disruptions. population.2 It is a fundamental component of the global Although there is a large amount of uncertainty about food system. This system encompasses the numerous exactly how climate change might impact world food processes and infrastructure involved in feeding the world’s production over the coming decades, there is general population, from growing, processing and transporting consensus that the overall effect will be negative.6 food products, to disposing of consumers’ waste. Increases in the intensity and frequency of extreme weather events such as floods, droughts and wildfires, The primary goal of food systems is to achieve food coupled with a rise in conditions amenable to the spread security, which exists when all people at all times have and persistence of agricultural pests and diseases, are access to sufficient, safe, nutritious food to maintain a expected to have a destabilising effect on world food healthy and active life.3 In principle, there is sufficient production. This is further exacerbated by the growing global aggregate food production for nearly everyone to issue of water scarcity, which is accelerating at such a be well fed, but there remain marked differences in levels pace that two-thirds of the world’s population could live of nourishment across the globe. Despite international under water stress conditions by 2025.7 focus, around one in nine of the world’s population is chronically hungry4 – and although the number of The continued globalisation of modern food networks people going hungry is falling, the ability of the global is introducing an unprecedented level of complexity to food supply to keep