El Niño drives redistribution of risk across re/insurance and ILS markets: Twelve Securis

With the development of a strong El Niño expected to be one of the key drivers of global catastrophe risk during the second half of 2026 and into early 2027, specialist catastrophe bond and insurance-linked securities (ILS) manager Twelve Securis believes that it will also drive a redistribution of risk across the re/insurance and ILS markets.

El Niño, which is the warm phase of the El Niño–Southern Oscillation (ENSO) is known to exert a strong influence on weather in the tropics around the world.

In its 2026 Atlantic Hurricane Season outlook, Twelve Securis highlights the climate-conditioned risks that El Niño brings, and the implications that this can have on the ILS market.

A key point to highlight from the ILS and cat bond manager’s report is that forecasts for the 2026 Atlantic hurricane season remain broadly consistent with the developing El Niño conditions. This heavily points towards a season where activity is below-average relative to long-term climatological norms.

However, while forecast methodologies and outlooks differ across various organisations, Twelve Securis stresses that there is general agreement that Atlantic tropical cyclone activity is likely to be suppressed compared with recent active seasons, marking a notable shift from the active conditions that have prevailed for much of the period since 1995.

“Forecasts for a strong El Niño to develop over the summer and into the winter are expected to affect global risk conditions during the second half of 2026 and potentially into spring 2027. Significantly, El Niño is expected to suppress Atlantic Hurricane activity with both public and privately communicated forecasts for the 2026 Hurricane season showing a consensus for below average activity. Uncertainty remains in the timing and strength of El Niño relative to the critical August-September peak of the Atlantic Hurricane season,” Twelve Securis said.

However, Twelve Securis emphasises that from an ILS perspective, El Niño represents a redistribution of risk rather than a simple reduction in risk, altering the geographic concentration and timing of potential losses.

“Changes in tropical cyclone activity vary significantly between basins. Increased flood risk in some regions can be offset by increased wildfire potential in others,” the firm explained.

An important factor Twelve Securis also addresses is the possibility of El Niño persisting into spring, which could lead to severe convective storm activity, including tornadoes and hail. While this activity would typically decline across the central United States, it would instead increase along the Gulf Coast and in the Southeast.

The firm notes that these shifts are driven by El Niño-induced changes in the position and strength of the jet stream, which alter atmospheric conditions favorable for severe weather development.

Moreover, the manager outlines that for ILS investors, the developing El Niño is likely to be supportive of Atlantic hurricane-exposed portfolios, but not to the extent implied by basin-wide activity forecasts alone. While climate-conditioned catastrophe modeling suggests that projected hurricane losses for 2026 are lower than those observed in recent years, they still remain materially above levels that might be implied by simple storm counts.

“Public and private forecasts consistently point to reduced Atlantic hurricane activity during 2026, which should lower expected losses for both catastrophe bonds and private ILS transactions exposed to U.S. wind risk. However, the relationship between seasonal hurricane activity and insured loss is imperfect. Climate-conditioned loss modelling indicates that tail risk remains elevated relative to what would be expected from ACE forecasts alone, reflecting the influence of persistently warm sea surface temperatures in the Gulf of Mexico and along parts of the U.S. East Coast,” Twelve Securis said.

Adding: “For ILS investors, this suggests that attachment probabilities and mark-to-market risk for higher-layer transactions may not decline in direct proportion to reductions in expected storm activity. More broadly, El Niño should be viewed as a redistribution of catastrophe risk rather than a simple reduction in risk, with lower Atlantic hurricane activity potentially offset by elevated typhoon, flood, wildfire, or severe weather risk in other regions and perils.”

In summary, Twelve Securis notes that the development of a significant El Niño is anticipated to be a key factor influencing global catastrophe risk in the latter half of 2026 and extending into early 2027.

Ultimately, persistently warm sea surface temperatures across the Gulf of Mexico and along portions of the U.S. East Coast may partially offset the suppressive influence of El Niño and sustain elevated tail risk for key coastal exposures.

“For insurers, reinsurers and ILS investors, the key implication is that El Niño should be viewed as a redistribution of risk rather than a simple reduction in risk. Seasonal forecasts provide valuable information for refining views of risk, but regional climate conditions, exposure concentrations and event-specific characteristics remain critical determinants of ultimate loss outcomes,” Twelve Securis added.

Concluding: “As a result, prudent risk assessment requires consideration of both large-scale climate drivers and the full distribution of potential losses rather than reliance on basin-wide activity metrics alone.”