Lloyd's City Risk Index analyses man-made and natural threats

Image: www.freedigitalphotos.net

With emerging markets particularly vulnerable to the fallout, only those that arm themselves in advance with proper risk scenario planning, adequate coverage and improved infrastructure will be able to ride the storm if any of these risks did materialise.

Risk advisory and financial crime associate director at Deloitte, Anthony Smith, says a crisis as far afield as Japan or Chile could have repercussions for banks and other businesses in Africa because of the inter-connectedness of the financial system.

Lloyd's City Risk Index 2015-2025 analyses, for the first time, the potential impact on the economic output of 301 of the world's major cities from 18 man-made and natural threats. Based on original research by the Cambridge Centre for Risk Studies at the University of Cambridge Judge Business School, the index shows that a market crash represents nearly a quarter of all cities' potential losses.

Financial losses

However, emerging economies will shoulder an increasing proportion of risk-related financial losses as a result of their accelerating economic growth - more than 70% of total GDP at risk was associated with emerging economies, with their cities often highly exposed to single natural catastrophes.

The amounts at risk are staggering, with over $4 trillion of economic output found to be at risk in the world's largest cities due to a host of dangers ranging from earthquakes, pandemics, nuclear disasters, terrorism, tsunamis and cyber-attacks.

The survey found that man-made threats were becoming increasingly significant. Market crashes, cyber-attacks, power outages and nuclear accidents alone are associated with almost a third of the total GDP that is at risk.

New or emerging threats were flagged as cyber-attacks, human pandemics, disease outbreaks and solar storms.

Inter-connectedness

"Without sounding alarmist, there is some reality to what is being said in the report. It isn't about a human pandemic as such, even though we have had really worrying health crises caused by Ebola, bird flu and SARS recently. But a lot of the risks are being driven by the inter-connectedness of the global financial system," says Smith.

But it must be remembered these are just risk scenarios that remain as such until materialised. However, each would warrant some thought. "For example, with cyber-crime we are behind the curve in SA. While the US and UK have increased their ability to respond to these threats significantly, other countries need to prepare for such an attack too."

Smith says that the risk of a sophisticated cyber-attack on the financial sector could have major repercussions for the South African economy, given that the sector is the heart and lungs of the economy.

Collapse in payments system

"We are regularly seeing bank systems going down, for example, as migration to new a system takes place. These typically lead to the inability for clients to transact.
A more widespread collapse in the payments systems following an attack could be disastrous," he says.

And with SA increasingly proposing nuclear as a viable solution to its energy crisis, the risks of a nuclear accident will need to be factored in.

"We cannot simply underestimate the panic that can set in if there is a major market crash like that of 1987 when the Dow lost more than 22% of its value. A natural disaster and the linkages of a cyber-attack to a GDP crash must be factored in to all risk modelling," says Smith.