As El Niño intensifies global drought losses to surpass $8bn: Aon

As the 2015/16 El Niño event intensifies there is an expectation that global economic losses from drought will surpass the previous forecasts of $8 billion, suggesting a growing toll for crop insurance, reinsurance and any ILS investors exposed to agricultural lines.

Reinsurance broker Aon Benfield’s risk modelling specialist unit Impact Forecasting expects the becoming intense El Niño will create prolonged drought conditions in some regions, while the expectation is that rainfall and flood could be higher in others.

It’s particularly hard to attribute economic or insurance losses directly to El Niño, but Impact Forecasting has made an attempt to quantify some of the impact in its latest catastrophe report for August.

Latest Sea Surface Temperatures SST's during the 2015 El Niño

The report notes that severe drought conditions persisted in the western regions of the United States, with an expectation of “total economic losses expected to reach at least USD3.0 billion – mostly attributable to agricultural damage in California.”

Additionally the drought conditions, whether El Niño created or not, are spreading with a number of “Caribbean and Central American nations issued alerts as droughts worsened.”

Drought conditions have also been seen during August in Eastern Europe, Africa, the Caribbean, and Central America. Combined economic losses of more than USD2.6 billion were recorded in Romania, Czech Republic, and Poland alone.

So the global economic toll from drought looks easily set to surpass the $8 billion forecast, resulting in a definite hit to crop insurance, reinsurance and potentially also to the collateralized reinsurers or ILS fund managers that allocate capital to crop and agriculture risks, of which there are a growing number.

And El Niño is responsible for much broader impacts to weather and climate patterns and variability, resulting in a growing chance of further losses to be borne by insurers, reinsurers and ILS markets.

Steve Bowen, Impact Forecasting associate director and meteorologist, explained; “As we continue to see the prospect of El Niño becoming one of the strongest in decades, more and more impacts will be apparent around the world. This is already true in the form of global drought losses, as several countries have endured a severe lack of rainfall and agricultural impacts.

“On the flip side, tropical cyclone activity in the Pacific Ocean maintained its torrid pace in August due to above-average sea surface temperatures and favorable atmospheric conditions. Multiple landfalling storms in Asia-Pacific left considerable damage, and more activity is expected as we enter the peak of the cyclone season.”

Indeed the Asia-Pacific typhoon season is already responsible for a significant economic hit from flooding, such as witnessed in China, which some meteorologists would say has been exacerbated by the intense El Niño conditions the globe has seen.

With almost every forecast for El Niño suggesting it will be stronger and longer-lasting, the expectation is that we are looking at near record conditions. That will exacerbate the amount of economic loss caused around the world and as a result cause increasing hits to insurers, reinsurance and potentially some ILS backed contracts.

Also read:

– El Niño forecast suggests one of strongest on record in 2015: NOAA.

– Climate models forecast El Niño to strengthen, persist into 2016.