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Fading El Niño – What’s Next For Insurance Industry?

A Q1 and El Niño wrap up

With winter and Q1, 2016, behind us, the insurance industry can review the active weather pattern and resulting insured losses. As mentioned in my blog post last fall, Florida experienced lots of weather activity, which is typical during strong El Niño winters such as this past one.  However, overall insured losses, while not historic, haven’t been benign either: Q1 losses ran about 31% above the 10-year average insured loss according to my estimates with Texas and the Southern Gulf states taking the brunt of the insured losses.  Although the remarkable blizzard (January 22–24) resulted in limited insured impacts based on the Property Claim Services (PCS) initial estimate, winter storms increased losses in the West.  In fact, the PCS issued four separate bulletins for the state of California more than any other year during the last 10 winter seasons.  Examples like this highlight the relatively predictable impacts of an El Niño winter.

After virtually tying the record for the strongest El Niño (as defined by a three-month running mean sea-surface temperature anomaly in the so-called Niño 3.4 region of the central and eastern equatorial Pacific Ocean), sea-surface temperatures (SST) are steadily cooling. NOAA’s March El Niño outlook suggests this El Niño may be all but gone by late spring or early summer.  In fact, some climate models and a recent government outlook suggest a shift to its opposite, La Niña by this fall.  As a result, the insurance industry needs to consider the potential for higher losses which are often associated with the La Niña phenomenon.

March_ENSO_Anomaly_SubSurface

Looking below the surface in the ocean waters in the Central Pacific, you can also see a trend of colder-than-average water working its way eastward across the International Date Line, eating away at the warmer-than-average equatorial Pacific water from below – another sign of a weakening El Niño.  Source: CPC

The unpredictable El Niño-La Niña relationship

Scatterplot showing the relationship in El Niño / La Niña states from one year to the next, for every year since 1950 in which an El Niño occurred. Each dot represents a pair of “year 1 vs. year 2” El Niño / La Niña states. In general, the stronger the El Niño (higher values on the x-axis), the stronger the subsequent La Niña (lower values on the y-axis). For more details and a larger version of the graphic, see the associated ENSO Blog post

Scatterplot showing the relationship in El Niño / La Niña states from one year to the next, for every year since 1950 in which an El Niño occurred. Each dot represents a pair of “year 1 vs. year 2” El Niño / La Niña states. In general, the stronger the El Niño (higher values on the x-axis), the stronger the subsequent La Niña (lower values on the y-axis). For more details and a larger version of the graphic, see the associated ENSO Blog post

El Niño and La Niña events each typically last for only 9-12 months, and they typically recur every 2-7 years, according to Columbia University’s International Research Institute for Climate and Society.  Flip-flops from a strong El Niño to La Niña are not unusual. For example, the record-setting El Niño of 1997-98 was almost immediately followed by La Niña the following summer, reaching moderate-to-strong intensity before finally ending in Spring, 2001. A similar pattern followed the strong El Niño of 1972-73.  However, neutral conditions followed three other strong El Niño’s that occurred in 1982-83, 1965-66 and 1957-58.

What Does It All Mean for the Insurance Industry?

Expect higher losses! If La Niña develops, 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.  However, there are some broad trends that have shown up in past weakening El Niño events that could give a hint on what to expect in 2016.

Severe Weather Season

Various climate forcers such as North American snowpack, Pacific Decadal Oscillation and Gulf of Mexico SST can influence North American severe weather, muddling the impacts that El Niño or La Niña might have. Disregarding these factors and only looking at past weakening El Niño events that transitioned to La Niña, the data suggests weather will vary based on location. A moderate-to-strong La Niña tends to promote severe weather across the Southeast (conversely, El Niño promotes severe weather in Florida, the high plains of Texas, and up through Colorado to Minnesota).

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. La Niña years seem to favor stronger storms over the Southeast (Dixi Alley). This area is densely populated, which may lead to more claims of severe weather.  But like with any weather peril, even a quiet year can have an EF-5 roll into a city and cause devastation.  In the end, insured losses are largely based on good luck or bad luck.  Example: if the Joplin tornado of 2011 had shifted a few miles south during that La Niña year, no one would talk about it today.

This severe weather season the key could be the summer heat expected in the central Plains and Great Lakes could mix with the wet spring expected in Texas and Louisiana and increase instability leading to storms in the Northern Plains and Ohio River Valley.

Atlantic Hurricane Season 2016

Much hype accompanied last hurricane season due to El Niño’s tendency to produce stronger wind shear, which tends to tear apart developing or mature tropical cyclones and result in less tropical development. Sure enough, June through October, 2015, Caribbean wind shear was the highest on record since 1979, according to Dr. Phil Klotzbach, tropical scientist at Colorado State University (CSU). The team at CSU has also in the past pointed out that the timing makes a big difference:  If a transition to La Niña happens late in the year, it’s less likely to influence the Atlantic hurricane season.  The forecast team at CSU will issue their first outlook for the 2016 Atlantic season on April 14.

However, the CSU team and other leading researches have pointed out that U.S. hurricane impact rises dramatically in a La Niña or neutral season compared to an El Niño season. On an annualized 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.

Hist_ENSO_Impacts

General stats of past La Niña and El Niño Atlantic hurricane seasons and the number of landfalls with adjusted historical total insured losses when accounting for all hurricane and tropical storm impacts for those years.

With El Niño potentially vanishing by the start of the 2016 hurricane season, the chance increases for tropical cyclones surviving to make U.S. landfall. If El Niño was the only factor, that is. I expect the team at CSU to discuss El Niño / La Niña, but also discuss the possible switch to a cool mode of the Atlantic Multidecadal Oscillation (AMO), which might suggest less storm activity in the next decade. This is because the far North Atlantic has been quite cold for about three years, and the SST pattern continues to cool (evolving as it did in the early 1960’s [the last time the AMO switched from a warm phase to cool phase with SST cooling in the North Atlantic and a slow progression of colder anomalies propagating into the tropical Atlantic and with warmer anomalies hanging on closer to the U.S. coastline).

The odds may shift a bit toward a more active Atlantic hurricane season in 2016, but El Niño’s absence doesn’t guarantee that outcome. Since the 2006 season, there have been some very active seasons with very few landfalling hurricanes, and the insurance industry still awaits that major hurricane landfall.

Summary:

El Niño, La Niña, or the lack of either (known as the neutral phase), is only one large-scale forcing on the atmosphere. Its presence or absence does not definitely determine severe weather or hurricane.  Climate models indicate a La Niña will follow the recent powerful El Niño, and we can look at past weather patterns to speculate future impact on particular insurance portfolios.  Right now the best analog years would be 1988, 1995, 1998, 2007, and 2010 during those years PCS losses averaged 10.6B, but what is more important is using those years to understand where the severe weather and hurricanes occurred to get an ideas of what might occur this year.  For example: U.S. landfalling hurricanes were limited, but in almost all those year the western Caribbean and Gulf of Mexico experienced some named storm activity.

2016_AnalogYears_v2

Historical hurricane tracks of the 1988, 1995, 1998, 2007, and 2010 hurricane seasons  Source: NOAA Historical Hurricane Tracks

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. BMS’ weather risk management module in iVision can help carriers better understand their risk and manage portfolio accumulation in areas prone to hurricanes and severe weather. iVision also has tools to track forecasted hurricanes, including detailed hurricane wind fields. It has several severe variables around severe weather which can be combined with hurricane layers to provide a holistic view of an event and help carriers understand the range of potential loss outcomes from extreme weather events.  Learn more about the Hurricane Risk Management Module and Severe Storm Risk Management Module.

Tropical Update: Arthur

With a month of the Atlantic hurricane season in the books, one might think that the quiet Atlantic hurricane season is unusual. Historically, however, the year-to-date Atlantic hurricane season typically only experiences an Accumulated Cyclone Energy (ACE) index value of 1, based on the 1981 – 2010 climatology. Also, on average the first named storm typically does not form until the first week in July, with the first hurricane not showing up until mid-August. According to Roger Pielke Jr.’s normalized economic hurricane loss dataset, when looking at damage from tropical cyclones, historically only 2% of hurricane damage occurs in July, with 95% occurring in August and September. In fact, with the development of the first named tropical storm of the 2014 Atlantic hurricane season (Arthur) off the southeast coast of the U.S., the 2014 season is matching nicely with climatology, and by July 4 it should be ahead of climatology.

Earlier this spring, in our first look at the 2014 hurricane season, it was mentioned that not all El Niño seasons are the same. Even if an El Niño develops, it does not mean that the Atlantic hurricane season will have limited impact. In that post we highlighted past seasons, such as 2004, where El Niño had a high impact and we further detailed the importance the warmer- than-normal Sea Surface Temperatures (SST) off the East Coast could have on the upcoming season. Arthur is currently centered over these warmer-than-normal SSTs and is expected to strengthen into the first hurricane of the 2014 season.

Above is the National Hurricane Center (NHC) official track and intensity forecast, as of 11 AM EDT, showing Arthur tracking along the southeast coast of the U.S. over waters of at least 26 degrees Celsius. This water temperature is warm enough to support hurricane development. According to the NHC, Arthur is expected to just by pass the Outer Banks of North Carolina as a category 1 hurricane on Friday July 4th.

Another factor that will aid in hurricane development is the natural curve of the southeast coastline. Historically, the curve of the coastline has helped similar storms develop in this area, by providing a natural pressure/wind gradient that allows for counter-clockwise rotation. In 2004, Hurricane Alex battered the outer banks and strengthened in a 42-hour period from a minimal 35 kts tropical storm to a 85 kts hurricane, as it tapped into the warm waters of the Gulf Stream. Hurricane Alex produced light damage in the Outer Banks, primarily from flooding and high winds. Over 100 houses were damaged and damage totaled approximately $7.5 million (2004 USD) in economic loss.

As Arthur develops, an approaching trough of low pressure that is moving into the central U.S. will provide an atmospheric pattern conducive to low pressure development on the southeast side of the trough; this low pressure will allow for further intensification later this week. However, this approaching trough will not only keep the upper Midwest and parts of the East Coast cool for the July 4th holiday weekend, it will likely provide the steering flow to push Arthur off shore and provide minimal impact to insured property along the East Coast. This would be similar to the impact of Alex in 2004.

The greatest threat will be to the North Carolina Outer Banks on the 4th of July, as the storm tracks 50 – 100 miles east as a possible strong category 1 hurricane. It has been 1 year, 10 months and 1 day since the last hurricane hit the U.S. (Hurricane Isaac). With the understanding that Superstorm Sandy was officially downgraded miles off the NJ coastline, keep in mind that hurricane Sandy rapidly strengthened, due to a warm gulf stream and Arthur has access to similar warm waters to spur it on. It is these warmer-than-normal SSTs that need to be watched all season.

2014 Atlantic Hurricane Forecasted Activity

The 2014 Atlantic hurricane season officially begins on June 1. A lot of preseason forecasts are hyping the importance a developing El Niño will have on the overall tropical activity in the Atlantic Basin, which should lead to less storm formation. However, a word of caution: there are plenty of examples of years with El Niños that had significant landfall activity across the U.S. Below is a list of the climate forcers that can influence named storm activity and how they will impact the 2014 season.

  • A weak to moderate El Niño is expected to develop, reducing named storm activity across the main development region in the Atlantic Basin.
  • A westerly to neutral Quasi-Biennial Oscillation will likely result in increased named storm development closer to the U.S. coastline, versus the development of Cape Verde-type storms.
  • Saharan dust can limit overall development of named storms, but conditions across North Africa are not favorable for large Saharan dust outbreaks and should not reduce named storm activity this year, but this climate forcer can change rapidly over the season.
  • Atlantic sea surface temperatures are warmer than the long-term average, but this temperature is slightly below-average relative to the current period of heightened sea surface temperatures that began in the mid-1990s. This will likely reduce activity in the main development region.
  • The sea surface temperatures are significantly above normal along the East Coast, which could increase development of named storms closer to the East Coast, increasing the threat of landfall.

The climate forcers above can provide an idea on the overall hurricane season activity, but, truthfully, there is little skill in predicting the total number of named storms and where they might make landfall. The best way for the insurance industry to prepare is to carefully consider the risks and their potential impact. BMS’ new weather risk management module in iVision can help carriers better understand their risk and manage portfolio accumulation in areas prone to hurricanes. iVision also has tools to track forecasted hurricanes, including detailed hurricane wind fields, which can help carriers understand the range of potential loss outcomes from landfalling hurricanes.  Learn more about the Hurricane Risk Management Module.

2014 Atlantic Hurricane Season and an El Niño

When the 2014 hurricane season officially starts on June 1, it will have been 3,142 days since the last Category 3 hurricane made landfall along the U.S coastline (Hurricane Wilma, 2005). This shatters the old record for the longest stretch between U.S. intense hurricanes since 1900. In fact, landfalls in general have been down since 2005, with a rate of 0.75 landfalls occurring per year since 2006, versus the rate of 1.78 that had been experienced since the warming of the Atlantic Multidecadal Oscillation in 1995.

Although Superstorm Sandy is still fresh in the minds of many insurers in the Northeast, insurers in hurricane-prone states could become complacent due to the lack of storms since 2005. The “doom and gloom” forecasts for the 2013 hurricane season failed to materialize, and early predictions for 2014 have already hinted at below-normal named storm activity, contributing to such complacency. These Atlantic hurricane forecasts call for hostile conditions across the deep tropics due to the development of an El Niño, which brings increased wind shear across the Main Development Region (MDR) of the Atlantic and could lead to less overall named storm formation.

There is a lot of chatter about the possible development of a “super El Niño” similar to that which occurred in 1997–1998. This type of event would drastically limit overall hurricane development. However, the Pacific Ocean is in an overall cold phase (the Pacific Decadal Oscillation (PDO)), a state which often makes it difficult to have strong, long-lived El Niño events. Instead, the PDO suggests a short-lived El Niño, but the specific manifestations of any given El Niño event greatly depend on its strength. Every El Niño event is different, but overall the phenomenon has become associated with the following:

* An uptick in the average global temperature

* Increased rainfall in Peru

* Drought in Australia

* Warmer than average temperatures in Alaska

* Elevated rainfall in California during moderate and strong events

* Dry weather in the Pacific Northwest states

* Increased snowfall in the Mid-Atlantic, especially for moderate El Niño events

* Cooler and wetter than average conditions in the Southeast U.S.

* Increased hurricane activity in the eastern tropical Pacific basin

* Depressed hurricane activity in the tropical Atlantic

While El Niño years generally have lower instances of named storms that make landfall, there are plenty of examples of El Niño-influenced hurricane seasons that have impacted the U.S. coast. Below is a look at such years, as well as the number of storms that made landfall and the adjusted insured loss in 2014 dollars.

Year # of Landfalling Storms Adjusted 2014 Insurance Loss
1957 2 $1,489,000,000
1965 2 $11,177,500,000
1969 1 (Camille) $8,250,000,000
1976 5 $300,000,000
1991 1 (Bob) $1,730,000,000
1992 1 (Andrew) $28,005,000,000
2002 6 $902,050,000
2004 6 $28,387,500,000

As we learned last year, seasonal forecasting has its challenges. Currently, there is a 75% chance of an El Niño developing this summer during the peak of the Atlantic hurricane season. However, in 2012 when an El Niño watch was issued, an El Niño never formed. In fact, since 1997 there have been five threats of a super El Niño that never developed. Therefore, taking into account the uncertainty in any seasonal climate forecast and the history as shown in the chart above, there can be an increased threat from tropical storms even in El Niño years. The 2014 seasonal forecast might also focus on other regional climate forces. One of these forces might be that the Sea Surface Temperatures (SST) off of the Eastern Seaboard of the U.S. are warmer than normal, which not only adds fuel to storms like Superstorm Sandy, but also could lead to deepening of pressures if any tropical disturbances tap into this potential fuel source later this summer. This warmer water also likely means that storms could develop closer to the U.S. coastline.

The new seasonal hurricane forecasts, which will roll out around June 1, tend to have increased accuracy as compared to the spring projections. These forecasts will continue to reflect the evolution of the El Niño, which can be followed on the Climate Prediction Center’s website (El Niño/La Niña Current Conditions and Expert Discussions). BMS will also provide updates throughout the season, but expect new seasonal forecasts to call for named storm formation to be below normal for the 2014 Atlantic hurricane season.