$44 Billion USD Economic Risk In Bogotá And Medellín; $20 Billion Due To Human Factors, Says Lloyd’s

Not counting the rest of Colombia, Bogotá and Medellín alone face a total of $43.97 billion USD of risk over the next decade, according to analysis by Lloyd’s of London. Human created risks, such as terrorism, cyber attacks, or market collapse make up 45% of the measured risk.

The analysis estimates that in Colombia, the annual combined GDP of Bogotá and Medellín together will grow to $255.34 billion dollars in the next decade, but 16.88% of this economic growth will remain at risk due to a combination of 18 natural and manmade factors.

Bogotá and Medellín’s growing importance in the ICT (Information, Communications, Technology) sector mean that their $1.19 billion USD exposure to cyber attack should not be overlooked.

Juan Carlos Realphe runs Lloyd’s Colombian operations.

A total of $15 billion dollars of GDP is at risk due to earthquake, and a market crash could expose another $14.5 billion dollars. Further exposures include $3.79 billion USD from a disease epidemic, $2.66 billion from hypothetical terrorist attacks, or $2.58 billion due to regional volcanic eruptions. Bogotá and Medellín’s growing importance in the ICT (Information, Communications, Technology) sector mean that their $1.19 billion USD exposure to cyber attack should not be overlooked.

“The Lloyd’s City Risk Index shows that manmade risks like cyber attacks or market collapse are growing worldwide as they are in Colombia, where these exposures put $20 billion dollars at risk,” said Lloyd’s Colombia representative Juan Carlos Realphe. “However, we cannot ignore the threat of natural disasters, particularly earthquakes. As the nature of the risk changes, insurers must continue to innovate in order to ensure that their products continue to adapt in evolving risk scenarios, to continue offering customers the protection that they need, and contribute to the international community adapting and overcoming adversity.”

Updated every two years, Lloyd’s City Risk Index 2015-2025 is a product of a research partnership between Lloyd’s and the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School to increase awareness of risks across the globe, and to encourage governments and companies to improve their responsiveness, risk management strategy, and protect their inhabitants and key infrastructure.

The study also highlights man made risks such as cyber attacks, commodity price fluctuations, and terrorism that in many cases pose more of a threat than traditional natural disasters such as floods, earthquakes, and droughts.

Globally, the index identifies three important emerging trends in the global risk landscape:

1. Emerging economies will shoulder two-thirds of risk related financial losses as a result of their accelerating economic growth, with their cities often highly exposed to single natural catastrophes.
2. Manmade risks such as market crash, power outages and nuclear accidents are becoming increasingly significant, associated with almost half the total GDP at risk. A market crash is the greatest economic vulnerability – representing nearly a quarter of all cities’ potential losses.
3. New or emerging risks, such as cyber attack, are also increasingly significant. Together, they account for more than a third of the total GDP at risk with just four – cyber attack, human pandemic, plant epidemic and solar storm – representing more than a fifth of the total GDP at risk.

The findings show the need for governments and businesses to work together to build more resilient infrastructure and institutions. How quickly a city recovers after a catastrophe is a key component of the total risk, and the impact of events is mitigated by rapid access to capital to help restore the economy.

“Insurers, governments, businesses and communities need to think about how they can improve the resilience of infrastructure and institutions. Insurance is part of the solution,” said Lloyd’s CEO Inga Beale. “Insurers must continue to innovate; ensure their products are relevant in this rapidly changing risk landscape, offer customers the protection they need and, as a result, contribute to a more resilient international community.”

What is GDP at Risk?

When a catastrophic event, such as an earthquake, a pandemic or a financial crisis, hits a city, it reduces its economic output. The loss of economic output, relative to the economic output that would have been expected, is the GDP at risk from an event. Lloyd’s City Risk Index 2015-2025 takes the first five years of lost economic output as the standard measure of GDP at risk from an event.
Cities are at risk from multiple threats. Lloyd’s City Risk Index considers 18 of them: cyber-attack, drought, earthquake, flood, freeze, heat wave, pandemic, market crash, nuclear accident, oil price shock, plant epidemic, power outage, solar storm, sovereign default, terrorism, tsunami, volcano and windstorm.

“This analysis for the Lloyd’s City Risk Index is the result of six years of research into catastrophic shocks on complex systems carried out at the Cambridge Centre for Risk Studies. It combines a detailed understanding of 18 different economic threats to the world’s most important cities. The measure “GDP@Risk” makes it possible to combine and compare a very wide range of threats, including those that are disruptive and costly, such as market collapse, in addition to destructive and deadly natural catastrophes,” said Professor Daniel Ralph, Academic Director of Cambridge Center for Risk Studies.

Lloyd’s estimates that the likelihood of each city being affected by different magnitudes of events between 2015 and 2025. These likelihoods vary from city to city depending on their locations and risk characteristics, but all of these events are rare and the probability of a city being impacted by any particular event scenario in the ten year period may be only a few percent.

They then estimate the GDP at risk from each event, were it to occur, for each city. How quickly a city recovers after a catastrophe is a key component of the total risk. The impact of events is mitigated by rapid access to capital to help restore the economy afterwards.

Summing all the expected losses from the different threats and their representative scenarios that could occur in each of the years from 2015 to 2025 gives the total GDP at risk for the city from all threats. This is a probability-weighted expected loss to the economy of that city from all threats.