The next massive tail risk

Tail risks such as COVID-19 are thankfully rare compared with other market shocks. However, they are a more regular occurrence than most people think, with pandemics being just one example, according to a report from Deutsche Bank Thematic Research.

The report considers various tail risks that could cause another global crisis, and assess the probability that they will occur.

It highlights there is a one-in-three chance that at least one of four major tail risks will occur within the next decade: a major influenza pandemic killing more than two million people; a globally catastrophic volcanic eruption; a major solar flare; or a global war.

Many of these risks are in fact regular historical occurrences, but because they haven’t happened recently have dropped off our radars, explain the researchers. For example, the 20th century saw three flu pandemics with over a million global deaths. That is more than double the confirmed global death toll from the coronavirus to date, and higher still on a per capita basis.

Meanwhile there has not been a massive volcanic eruption or solar flare since the 19th century, but both would have the potential to cause severe global disruption. Indeed, the world got a warning of what could happen when the Icelandic volcano in 2010 shut down most of European airspace, or the city of Quebec lost power for 9 hours in 1989 following a geomagnetic storm.

These risks are real, and the second-round effects after their initial impact can have significant effects in their own right, just as the coronavirus has led to extensive shutdowns and a global recession, according to the report.

While this has been a comparatively stable period of history, recent events have shown that tail events such can change economies and societies in a matter of weeks, concludes the DB report. It is likely that more such events will happen in the coming decades.