Long-term El Niño (ENSO) correlation holds little predictive power for annual property losses: KCC

According to a recent paper by catastrophe risk modeler Karen Clark & Company (KCC), while a long-term correlation exists between El Niño/Southern Oscillation (ENSO) phases and insured property losses, the climate pattern holds relatively little predictive power for any single year.

The El Niño/Southern Oscillation (ENSO) is a climate pattern that involves sea-surface temperature changes in the eastern tropical Pacific Ocean.

In its paper, KCC observes that sea-surface temperatures in the tropical Eastern Pacific have become anomalously warm in recent months, which heavily indicates the El Niño phase of ENSO.

“NOAA officially declared the El Niño in June and forecasts that it will strengthen into the 2026–2027 winter season, with a projected peak in November–January. The current El Niño is likely to be extreme, with NOAA’s Climate Prediction Center estimating a greater than 60 percent probability of a “very strong” El Niño based on a compilation of forecasts from many different statistical and physical models,” KCC explained.

These large-scale atmospheric changes have major implications for tropical cyclones. Warm waters in the tropical Eastern Pacific promote convection and enhance thunderstorm activity, altering the upper-level winds that connect the Pacific and Atlantic basins.

Data from KCC’s report shows that while more hurricanes typically form during La Niña, neutral years have actually seen some of the highest activity on record. Conversely, El Niño years usually suppress hurricane formation, though highly active seasons can still occur.

However, the relationship between ENSO and insured losses is fairly unique, as the most important driver of losses is typically landfall location. Since 1990, the largest loss years based on current exposure occurred during neutral phases.

“Hurricanes are like real estate: the three most important things are location, location, location. One landfalling major hurricane like Andrew can drive significant losses, or multiple landfalling hurricanes can combine to produce only moderate losses. 2020, a La Niña year, was a very active season, having broken the record for the number of named storms and tied the record for number for hurricane landfalls with six. However, insured losses in 2020 were about average,” KCC’s paper explained.

To account for these complex atmospheric variables, KCC’s scientists have integrated ENSO directly into their modeling frameworks using a 100,000-year Stochastic Event Catalog

“For each year in the 100,000-year Stochastic Event Catalogs, a value representing the phase of ENSO is assigned. The ENSO cycle is characteristic of a red noise process because there is autocorrelation from month to month. In comparison, in a white noise process, each month is random and independent of the previous months,” KCC said.

Adding: “As a red noise process, the value of the ENSO index for a given month depends partly on what the index was in the previous month. The result is the oscillating ENSO phases that cycle every two to seven years. By treating ENSO as a red noise process, a 100,000-year synthetic monthly ENSO index time series is created with statistics that are consistent with historical index values.”

Looking ahead, current outlooks suggest this strong El Niño will persist into 2027. For the United States, this implies a quieter 2026 hurricane season, alongside wetter conditions in the West, a snowier winter in the Northeast, and increased severe convective storm activity along the Gulf and Southeast coasts in the spring.

Conversely, this also indicates that the Northwest Pacific may experience longer-lived, more intense tropical cyclones, while Australia and Indonesia face heightened drought and wildfire risks through at least January 2027. Yet, KCC cautions against complacency based on these broad seasonal forecasts.

“While there is correlation between ENSO phase and property losses over the long run, which is incorporated into the KCC models, ENSO has relatively little predictive power for a given year,” KCC said.

“For example, it would take only one major hurricane striking Miami, Tampa, or Houston to cause insured losses exceeding $100 billion today and that can happen in any year. Similarly, although El Niño years are generally associated with lower fire activity, one large fire impacting Los Angeles or another highly populated area could cause losses on par with the Palisades and Eaton Fires. The 2018 Camp Fire, at the time the costliest fire in California history, occurred during a developing El Niño,” the firm concluded.