This report describes the need for a systemic assessment of the taxonomy of macro-catastrophe threats that have the potential to cause damage and disruption to social and economic systems in the modern globalised world.
It presents the threat taxonomy developed as part of the Cambridge Risk Framework and describes the methodology used, including a categorisation based on casual similarity. These threats are of interest because they are complex risks – they impact the networks of activities that underpin the global economy, disrupting the interrelationships that drive business, and causing losses in unexpected ways and places.
They have multiple consequences, in causing severe direct losses, but also operational challenges to business continuity, cascades of effects on counterparties and the macroeconomy in general. They can trigger financial crises and they impact the capital markets and investment portfolios.
These risks are generally recognised by risk managers and analysts but they are not well understood. The field currently suffers from confusion of definition. This report summarises the wide range of terminology in use and proposes a standardisation of risk terminology in the field. We propose a definition of the macro-catastrophe threat.
Developing the Cambridge taxonomy
The Centre for Risk Studies has developed a taxonomy of macro-catastrophe threats using the proposed definition. Identifying threats has involved an extensive historical review of causes of social and economic disruption over the past thousand years. This was augmented with a review of catastrophe catalogues and databases, a precedent review, a study of counter-factual theories.
The Cambridge Taxonomy is organised in a hierarchy of causal similarity, into 5 Primary Classes, 11 Families, and 55 (Genus) Types. The structure can be further subdivided into more granular types as required.
Use of this taxonomy by stakeholders
The framework and the taxonomy are intended for use in a number of applications, including use in insurance accumulation management for complex threats that can impact multiple lines of business. The taxonomy provides a framework for populating with more detailed studies of each threat.