A Lloyds emerging risk report June 2015

Food System Shock: The insurance impacts of acute disruption to global food supply.

Below is an excerpt from the report:

A global production shock of the kind set out in the extreme scenario outlined in this report would be expected to generate major economic and political impacts that could affect clients across a very wide spectrum of insurance classes. This analysis has presented the initial findings for some of the key risk exposures. Insurers could be faced with complex claims, particularly relating to clash of cover and proximate cause, and their ability to pay claims quickly will be an important factor for post-shock recovery. The effects of the food price shock would likely have significant impacts on the insurance industry beyond the need to pay a large number of highly complicated claims.

The destabilising effect of a spike in the price of staple crops on global stock markets would be expected to have major consequences for companies’ investment income. Unlike many of the extreme loss events faced by the industry where insurers’ balance sheets generally recover in the year following the event, there is potential for the events in this scenario to generate losses that span many years – prolonged El Niño phases can last up to two years, 46 while substantial political upheaval can take decades to resolve. Heightened political tensions might lead to greater restrictions on international business, which could limit the opportunities of insurers overseas.

However, the growing threat of food insecurity does bring opportunities for insurers. As businesses become increasingly aware of the threat posed by food system disruption, they might invest more heavily in comprehensive risk transfer structures, and a severe shock could motivate individuals and businesses to address gaps in their risk management. Insurers can be expected to have a key role in assisting clients to understand their risk exposure and to tailor appropriate risk transfer solutions. The global food system is under chronic pressure to meet an ever-rising demand, and its vulnerability to acute disruptions is compounded by factors such as climate change, water stress, ongoing globalisation and heightening political instability. The insurance industry is in a position to make an important contribution to improving the resilience and sustainability of the global food system.

Link to the complete June 2015 report

Food System Shock June 2015