The U.S. NOAA recently issued an official La Niña watch stating that conditions were favourable for the phenomena to develop within six months, which could result in higher losses for the insurance and reinsurance sector, according to Andrew Siffert of BMS Intermediaries Inc.
Following the decline of the recent El Niño phase forecasters predicted a 50% chance of a La Niña event developing, with the U.S. NOAA now warning that “conditions were favourable for La Niña to develop within the next six months.”
And according to Siffert, Assistant Vice President and Senior Meteorologist of BMS Intermediaries Inc., the transition into a La Niña phase could result in higher losses for the insurance, reinsurance, and possibly even the insurance-linked securities (ILS) market.
Should La Niña develop, “Expect higher losses,” said Siffert, adding that, “historical insurance industry losses suggest worldwide impacts, but likely these impacts won’t be fully felt until 2017 when the La Niña is fully developed.”
“Although insurance loss data suggest on average a La Niña year sees about double the insured loss that might occur during El Niño years, the reason for increased losses may have more to do with the location of the losses than the severity of the storms,” continued Siffert.
Siffert explains that during a La Niña phase or neutral season the U.S. experiences a greater number of hurricanes. In fact, data reveals that on an annualised basis since 1950, “major hurricane landfall rates during La Niña years are 20% higher than neutral conditions and almost 280% higher than El Niño rates.”
But it’s not just hurricanes that can be seen to increase in activity during a La Niña phase, explained Siffert speaking with Artemis, as data shows that historically, most large outbreaks of U.S. tornadoes occur during La Niña years.
In fact, Siffert claims that, “In term of the U.S. strongest tornadoes (the EF 5) 25 have occurred during La Niña – 18 Neutral Conditions and 15 during El Niño,” so an extra 10 events during the La Niña phase.
As noted earlier by Siffert the location of storms during a La Niña phase could be a reason for increased losses, with the weather pattern seeming to favour stronger storms over the Southeast of the U.S., also known as Dixie alley.
Furthermore, Siffert explained to Artemis that La Niña poses a threat to insurers, reinsurers, and possibly ILS players that operate in various regions. With the highest risk peril regions being Australia flood, Australia cyclone, Atlantic hurricane, Northern South American flood, and China typhoon, noted Siffert.
As highlighted the impacts of La Niña are more likely to be felt in mature, more developed regions of the world, like the U.S., Australia, and China, where perhaps asset values and populations are higher and far more concentrated.
As a result, an increase in hurricane activity, flood events, or cyclones as a result of entering into a La Niña year could create increased losses for the insurance and reinsurance industry.
The impacts of both La Niña and El Niño conditions on natural disaster events across the globe continues to be debated among the entire risk transfer industry, with varied opinions on the potential for more intense and frequent storms.
That being said, the data provided by Siffert suggests the potential for more hurricane activity in the U.S., more tornado activity in the U.S., typhoons in China, and so on, places around the world where the potential exposures are huge.
Research into weather events like this is vital to the development of adequate and capable risk models used by the re/insurance and ILS community to price and assess risks globally.
“Climate forcers like El Niño and La Niña can help predict the frequency of overall extreme weather activity, but truthfully, long-term predictions about the number of named storms, location of landfall or the power of other severe weather is impossible.
“The best way for the insurance industry to prepare is to carefully consider the risks and their potential impact,” said Siffert.
The images below show the main La Niña precipitation and temperature impacts, according to the UK Met Office.