2015 El Niño
As predicted earlier this year, an El Niño event has been developing in the Equatorial Pacific. By most objective metrics, the event looks to be strong, with all defining atmospheric or oceanic variables showing the characteristic El Niño pattern (see image above). Exceptionally, the September sea surface temperature anomaly as pictured in the map in the NIÑO 3.4 region has exceeded 2.2°C, making the 2015 September the warmest on record.
In a recent WillisWire blog, Geoff Saville discussed the science of forecasting and the confidence we can have in long term predictions. Here, we focus on the impacts of El Niño on the Northern hemisphere hurricane activity and its possible consequences for the (re)insurance industry.
As reported by the International Research Institute (IRI) at Columbia University and depicted below, there is a relative consensus among dynamical and statistical models that further strengthening of the El Niño SST conditions will continue over the next several months. The expected weather responses, as for example, the long-awaited rain in California, are more likely to occur toward the end of the year as El Niño reaches its peak intensity.
2015 Hurricane Activity
Although the expected rains haven’t yet reached California, some clear El Niño impacts have already materialized through the recorded levels of tropical cyclone activity in the Northern Atlantic and Northern Pacific basins.
El Niño classically leads to reduced hurricane activity in the Atlantic and increased activity in the Pacific. The following table illustrates this clearly by comparing the 2015 year-to-date (YTD) tropical cyclone activity with the corresponding YTD long-term-average (mean over 1981-2010). The measure used to describe the basin-wide tropical cyclone activity is the Accumulated Cyclone Energy (ACE) which takes into account the number, strength and duration of all tropical storms in the season.
According to this measure, the North Atlantic basin, one of the key reinsurance loss drivers globally, is experiencing 58% of normal activity, while the Northern Pacific (NP) is at 174% and the Eastern & Central Pacific at 202%.
Eastern Pacific tropical cyclones hitting the West coast of Mexico have less potential to produce large reinsurance losses than U.S. hurricanes, however, the recent record breaking Category 5 Hurricane Patricia could have been a significant loss event had it made landfall in a more populated area.
On October 23, Patricia was named the most powerful hurricane ever recorded in the Western Hemisphere. The storm ”exploded” from a tropical storm to a strong Category 5 within only 24 hours, as its maximum sustained winds reached an unprecedented 200 mph and its central pressure fell to 879 millibars. It is becoming clear that what made Patricia possible was the existence of the El Niño event which provided a pool of warm ocean water underneath the storm, the necessary fuel for Patricia to spin up so fast, as we see here:
The current El Niño is expected to be one of the strongest events of the last half-century or at least the most intense since the 1997-1998 event.
In addition to the impacts already mentioned, El Niño generally increases Pacific Typhoon activity, drought and bushfire in Australia, and potentially, winter flooding in California. Clearly the phenomenon is associated with an increased correlation between weather events across the globe.
The opposite of El Niño, La Niña, tends to increase the Atlantic hurricane activity and drive increased cyclones and rain in Australia.
Overall these correlated changes in weather highlight something the reinsurance industry tends to ignore: that losses in widely separated countries are not always independent, and thus geographic diversification is no guarantee of loss diversification. This has definite consequences for estimation of overall capital requirements, though it is still hard to quantify how significant those effects may be.
This article was Co-Authored by Rick Thomas, an Executive Director at Willis Re International with 20 years of experience in reinsurance underwriting cat model building, risk management and reinsurance buying. He also has detailed knowledge of the capital markets space. In Willis Re, Rick oversees both the model research and evaluation and the analytics and model development teams at Willis Re. He also leads the Willis Re International ILS practice group and is Head of Strategy for the Willis Research Network.