El Niño research can aid optimisation of climate risk pooling

by Artemis on March 29, 2016

New research into the global impacts of El Niño conditions claims to assist with the optimisation of climate risk pooling facilities, providing an opportunity for insurers, reinsurers, and insurance-linked securities (ILS) players to expand their reach and diversify.

Pradipta Parhi, a graduate research assistant in Columbia’s Department of Earth and Environmental Engineering and formerly of Merrill Lynch, has conducted new research into the El Niño weather phenomenon, which looks at the weather pattern’s impact in the Sahel and East Africa from a different angle than previous studies.

Parhi explains that previous studies into the weather anomaly’s impact on wetter-than-usual, and drier-than-usual rainy seasons across the Sahel and Eastern Africa utilise monthly data and parametric statistical methods.

“We instead used daily rainfall from multiple datasets (station, satellite, reanalysis) and applied robust non-parametric methods. Furthermore, instead of focusing only on seasonally-averaged rainfall, we report on multiple characteristics such as frequency and intensity of rainfall events,” explained Parhi.

The main conclusion from the research paper, ‘Resolving Contrasting Regional Rainfall Responses to El Niño over Tropical Africa,’ is “that the inter-annual variability of seasonal rainfall – both the drier response over Sahel and the wetter response over tropical eastern Africa – is mainly explained by changes in the frequency of daily rainfall events rather than by the intensity of those events.

“Another interesting conclusion is that the most extreme daily precipitation intensity (99.9 percentile) is not significantly different in either region during El Niño compared to a neutral year,” said Parhi.

As a result of the reports findings, Parhi told Artemis that not only will the new information be valuable for climate risk management, but also “the identification of the regions and seasons with robust heterogeneous climate response from the regional analysis, can be used to analyze the diversification benefits of a climate risk pool or portfolio.”

Climate and weather risk financing pools such as the African Risk Capacity (ARC) and the Caribbean Catastrophe Risk Insurance Facility (CCRIF) are innovative catastrophe risk transfer schemes that aim to improve the resilience, sustainability, and economic power of poorer countries in the face of adverse weather and climate events.

The new findings and understanding of the El Niño phase across certain regions, says Parhi, provides insurers, reinsurers, and ILS funds and managers with an opportunity to “expand their market and further geographical diversification by participating in these efforts.”

Furthermore, a more comprehensive understanding on the impacts of El Niño during particular seasons in regions that have already established a catastrophe or climate risk financing pool, like ARC in Africa, could help re/insurers and ILS players decide when to, and not to deploy capital into such pools, so really a benefit to portfolio optimisation.

“This should ultimately lead to a more efficient pooling strategy and increase the affordability due to reduction in the risk premiums at both sovereign and farmer levels. Our research is also at inter-annual time scale which matches the typical re/insurance contract life cycle,” said Parhi.

Just how much El Niño, and other global weather patterns/anomalies impact the climate and resulting extreme weather events is a constant debate among the weather and increasingly risk transfer industry.

However, any additional research and findings into its potential to increase or decrease rainfall across numerous regions during various seasons, will likely prove valuable to risk managers, insurers, reinsurers, and ILS players that operate already, or are looking to expand their reach into emerging regions and risks, including any future participation in climate risk financing pools.

Also read:

El Niño and NAO drive climate in 2015, but not losses: Guy Carpenter.

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