El Nino: A Potential Solution for Lower Insurance Losses?
Recent weather signals suggest that there is now a 70% chance of an El Nino developing this year after three consecutive La Nina events, which leads to higher industry losses than El Nino. Aon's analysis suggests the current triple-dip La Nina event is about to push the Pacific climate into a drought cycle that drives warmer-than-average temperatures, particularly across southern and eastern Australia, increasing the likelihood of high fire-danger weather days. If El Nino develops as expected, there is a chance the situation could flip in favor of Australia's plan to reduce losses. A moderate El Nino event in the 2023-2025 period could potentially exert downward pressure on insurance losses.
While El Nino, "periods of reduced flooding, cyclone and overall losses," can also lead to drought, coral bleaching, heatwaves, and human health implications. However, Aon suggests that the benefits outweigh the potential drawbacks and reduce losses in the long-term.
Australia's Increasingly Volatile Weather Conditions
Despite the potential benefits of El Nino, Australia continually faces increasingly volatile weather conditions, which Aon experts believe might be enhanced by the growing effects of climate change. Since flooding is now Australia's second-most costly peril since 1967 at a total of $23.53 billion of industry reported losses, followed by hailstorms ($21.45 billion), industry experts believe that solutions like El Nino are essential to reducing losses.
Four of Australia's highest loss years - 1974, 1999, 2011, and 2022 - were all under La Nina. The analysis of normalised industry losses since 1967 shows 80% of flood losses and 65% of cyclone losses occur during La Nina years, while 40% of bushfire losses occur during El Nino years.
Last year alone, flood losses were the costliest peril for the third consecutive year, accounting for more than 61% of the loss total. Insured losses reached around $US11 billion ($16.2 billion), up 18% on the median. Roughly a third were related to catastrophes in Australia, with $6.95 billion of industry-reported losses. In 2023, Auckland floods and Cyclone Gabrielle are expected to generate total insured losses over $NZ2 billion ($1.82 billion) and $NZ1.5 billion ($1.37 billion) in New Zealand, respectively.
"The historical loss record shows us that bushfire losses are correlated to periods of El Nino, albeit to a lesser extent than floods and cyclones are to La Nina," said Aon senior analyst, Tom Mortlock. "El Nino years have typically led to lower total insured loss years in Australia than La Nina years, and while floods and cyclones do occur during El Nino, they are less likely."
The importance of "secondary perils" to Australia's natural hazard environment is highlighted by the record March 2022 floods in Queensland and NSW floods, which were the largest insured loss event for Australia with a reported industry loss of $5.809 billion. Therefore, the potential shift to El Nino can bring relief to the natural hazard environment and reduce insurance losses, which have surged due to severe weather volatility.
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