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Impacts of Severe Natural Catastrophes on Financial Markets

This report explores the potential for very large natural catastrophes to trigger market shocks and subsequent economic downturns that have an impact on an insurance company's balance sheet. It features six natural catastrophe scenarios.  

Overview

The last decade has seen an increase in high-cost natural catastrophes. Six catastrophes have caused destruction costing $10 billion or more in the last ten years. 2017 also represented a record year for loss as a result of significant floods, earthquakes and hurricanes impacting major economies, such as Hurricane Harvey in the Southern US, Hurricane Maria in the Caribbean, and major mudslides in India, Bangladesh and Nepal. 

Due to the increase in accrued damages from natural catastrophes worldwide, the potential loss vectors for future natural catastrophes are growing. Climate change is a factor, contributing to the frequency of floods, hurricanes and droughts. If a future natural catastrophe could cause a disruption of economic output of a trillion dollars or more, could this trigger a stock market devaluation that would impact investment portfolios? 

Over the course of several years, the Cambridge Centre for Risk Studies has identified a number of potential 'Trillion Dollar Nat-Cats', by using the Cambridge Global Risk Index to identify cities at risk from major natural catastrophes. From these, six scenarios across three threat groups are featured and analysed extensively in this report for their potential effect on markets and investment portfolios. 

There are six scenarios featured in this report. They consist of two major earthquakes, two tropical windstorm events, and two volcanic eruptions. They are located in multiple locations including Los Angeles and the surrounding area, the Kanto subduction zone affecting Tokyo, Miami and the Florida Coast, Mount Marapi in West Sumatra in Indonesia, and Mount Rainier in Washington, United States.