You probably remember from your natural science classes at school: El Niño is a large scale reversal of normal atmospheric circulation over the Pacific Ocean, happening about once every five years. It is primarily associated with a strong increase of sea surface temperatures in the equatorial Pacific. The term "El Niño" was originally coined by South American fishermen, referring to the periodical Christmas-time warming of the ocean that would reduce their catch.
An El Niño is currently developing fast and will be in full swing by late summer. The effects of El Niño can reach far beyond rising ocean temperatures, or just the Pacific region. Here's a short list of weather changes in various regions during an El Niño event:
-- Drier than normal in… South East Asia; Eastern Australia; India; South-Eastern Africa; northern parts of South
-- Wetter than normal in… Southern US (especially the Gulf coast, but also California… where it certainly would be
welcome after years of drought); Ecuador/Peru; southern China.
-- Warmer than normal in… essentially the areas that are "drier than normal", with the addition of Canada and
-- Colder than normal in… essentially the areas that are "wetter than normal".
-- Wildfire risk… increases wherever it's drier than normal.
-- Flooding risk… increases wherever it's wetter than normal.
-- Tropical Cyclone / Hurricane risk…
…increases during El Niño years in the Central and Eastern Pacific (Mexico), including the Central South Pacific
(Fiji, Tonga, Samoa,…).
…decreases along the Gulf coast of the United States, Mexico as well as throughout the Caribbean, around
Australia and in the South China Sea.
-- Tornado Risk… generally decreases in the US.
Clearly, the unusual weather triggered by an El Niño can have locally severe consequences. So, is it a big thing for reinsurance too?
The short answer: No, it's not. Obviously, there are some specialized business segments or individual transactions, where El Niño effects are taken into account. For instance, the price of weather derivatives relies on long-range weather forecasts, and thus accounts for anticipated effects of El Niño. But the bulk of traditional reinsurance renewals will commonly not react to an El Niño event. I see three key reasons for this:
-- Low forecast skill:
If you wanted to take El Niño effects into account when signing a reinsurance contract, you'd need a reliable forecast. However, currently even a six-month forecast still comes with huge uncertainties.
-- High variability of impact:
Every El Niño is different, and impacts may deviate strongly from the average. Hurricane Andrew in 1992 devastated Florida during an El Niño year – probably the classic example of a massive insurance industry impact in a year of generally decreased US/Caribbean hurricane activity.
-- Long-term partnerships:
Many of the top and mid-tier reinsurers strive to be a reliable partner for their clients in the long term and across multiple lines of business. With this goal in mind, reacting to climate fluctuations on an annual scale – as El Niño – makes no sense.
Whether it's the fishermen's catch, drought in South East Asia or the Atlantic hurricane season, this post will hardly be the last time you read about El Niño this year.
Category: Climate/natural disasters: Disaster risk, Drought, Floods/storms