Stronger El Niño could both help and hinder re/insurance: KBW

by Artemis on June 15, 2015

Recent reports that the impending El Niño event in the Pacific Ocean may onset more quickly and be stronger than forecast could be both a help and hindrance to the insurance and reinsurance market, according to analysts at Keefe, Bruyette & Woods (KBW).

Predictions from the NOAA that there’s a greater than 90% chance of El Niño conditions remaining throughout the summer and fall provides a signal to global re/insurers of fewer Atlantic hurricanes. The latest forecasts also show an 85% chance that El Niño conditions will last through winter 2015-16, which could prolong the impacts to weather and climatic conditions from this ENSO cycle.

Latest SST's El Nino

Although seen as a positive for most in the reinsurance industry, the downside says KBW “is that if 2015 proves to be another quiet hurricane year, it’s more likely that double-digit rate decreases will continue for 2016 renewals.”

Contrasting to KBW’s final point, RBC Capital Markets recently said that for European reinsurers, the best-case scenario in current market conditions would be for a continuation of benign catastrophe losses, as a ‘normal’ loss year “would not lead to any uptick or stabilisation of pricing and would only serve to dampen capital returns.”

It’s also possible that a stronger and earlier El Niño event could lead to a hike in the number of Southeastern tornadoes, explains KBW, including a rise in the volume of low-to-moderate severity catastrophe losses. Note: a recent study suggests that U.S. severe thunderstorm and tornado incidence can decline during an El Niño year.

The problem here explains KBW, is that historically “these events can often fall below reinsurance retention thresholds, pressuring primary insurers without much impact to reinsurers.”

Offsetting the negative impact of a rise in tornado activity is the potential for El Niño conditions to increase U.S. rainfall, says KBW. Highlighting that so as long as rainfall isn’t excessive, it can boost U.S. crop yields and help to mitigate drought conditions.

So it’s clear from the KBW report that the impending El Niño event has the potential to help re/insurers avoid losses with certain risks, but perhaps increases the likelihood of a loss from a different risk entirely. That makes being prepared and having a robust reinsurance program that covers multiple perils even more important.

Just how much of an impact the imminent El Niño conditions have on the global re/insurance sector is still to be seen, but companies with exposures would be wise to keep an eye on any developments.

KBW concludes, noting that it’s wise to remain alert in an El Niño year; “We caution investors taking action in response to El Niño trends, Hurricane Andrew occurred during El Niño conditions, highlighting the risk that one storm makes landfall at a large coastal city.”

Subscribe for free and receive weekly Artemis email updates

Sign up for our regular free email newsletter and ensure you never miss any of the news from Artemis.

← Older Article

Newer Article →