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Climate Volatility & Financial Losses

In the financial world, the biggest indicator of future risk is the volatility index, whether it is equities or bonds most investors look at VIX while judging the road ahead. And its relationship with the return is inverse, meaning the lower the VIX higher the return. But the lower VIX also indicates the risk of reversal sooner than later.

The same measurement can be applied to the real world but in this VIX is related to the normalcy in climate, which is indicated by the average temperature. So if the VIX was to be drawn for this year then it would be spiking. This is because the world is going through the highest temperature since started recording leading to heatwaves. And at the same time, many countries are facing floods along with global El Niño risk.

All of this does result in loss of life due to direct and indirect reasons. But it also leads to financial losses that impact people throughout the world irrespective of location. In the last two years, global disaster insured losses amounted to $120-125Bn per year, which is $40 Bn more than average since 2012. The USA alone has already faced a Disaster event cost of $32Bn for 2023 which is till now same as 2021.

The problem only escalates from here as the world already faces disturbances in the food supply chain. The combination of such factors will put a strain on food prices throughout the world and also might reverse the inflation trend that has already impacted many.

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