November 7th, 2012

Implications of Changing Climate Patterns

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President
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The extent of rising insured losses from global natural catastrophes over the last 40 years is illustrated by Figure 1. This is partly a consequence of insurance penetration and population growth, particularly along coastal regions. The impact of climate change, and whether it has contributed to increased insured natural catastrophe losses to date, continues to divide scientific opinion, and the debate remains largely unsettled.

Figure 1

f4cold-spots1

The impact of the El Niño Southern Oscillation (ENSO) on climatic conditions is more conclusive. ENSO is the most prominent year-to-year climate fluctuation on the planet. It originates in the tropical Pacific, with unusually warm (El Niño) and unusually cold
(La Niña) events often recurring every three to seven years (although they sometimes occur in consecutive years). (1)

As demonstrated by recent events, the El Niño and La Niña cycles can have significant consequences on extreme weather events. El Niño and La Niña shift risks of storm and flood damage in recognizable ways and are predictable about six months in advance. For example, the highly active 2010 and 2011 Atlantic hurricane seasons (and subdued typhoon activity in the West Pacific) were associated with a La Niña event that was predicted several months in advance.

ENSO can also contribute to flooding events. During 2011’s La Niña event, the most prominent flooding events occurred in Australia and Thailand. Severe flooding typical of a La Niña event also hit other emerging economies in 2011. Widespread flooding destroyed hundreds of thousands of homes in Colombia, while damaging floods were also reported in Brazil, Southern Africa and Sri Lanka.

Equally destructive flooding can also occur during El Niño years. During the last very strong El Niño event in 1997-1998, for example, severe flooding hit Kenya, Ecuador and California.

The weather patterns associated with each El Niño and La Niña cycle expose (re)insurers to significant losses worldwide, and the costs associated with these events are increasing, particularly in developing markets. This trend is likely to accelerate as emerging economies continue to prosper.

Note:

1.  The Guy Carpenter Asia-Pacific Climate Impact Centre (GCACIC) recently published its third annual report that discusses the impact of ENSO on climate-related risks in the Asia-Pacific region.

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