Aon climate expert on El Niño and insurance losses impact

Aon climate expert on El Niño and insurance losses impact | Insurance Business Australia

Catastrophe & Flood

Aon climate expert on El Niño and insurance losses impact

It’s better news than La Niña

Catastrophe & Flood

By
Daniel Wood

Earlier this month, the World Meteorological Organization (WMO) declared that an El Niño weather pattern has developed for the first time in seven years. This increases the global likelihood of high temperatures and fires.

The heightened bushfire risk could be insurers’ natural catastrophe challenge in the coming months. However, as Tom Mortlock (pictured above), senior analyst at the global brokerage Aon explained, from an insurance perspective, the prospect of bushfires is better news than floods.

“Bushfire events, from an insurance perspective, not an economic loss perspective, generally produce lower loss values,” Mortlock said. “Overall, we do see significantly lower loss years during El Niño than La Niña because floods and cyclones often produce higher losses and there is more exposure on the east coast.”

Mortlock said, as a result, Aon is expecting a “more quiescent loss period” coming up in terms of Australia’s industry insured losses compared to the last few years.

In June, Aon released its weather and climate insights report. In alignment with the WMO, the report observed that, during winter, Australia can expect to transition from La Niña to El Niño conditions. Aon’s media release said the transition follows “an extended period of pervasive La Niña and high catastrophe (CAT) losses.” 

“Looking at the loss record over for Australia back to the 1960s, we see strong correlations between floods and cyclones in periods of La Niña, that is very clear,” said Mortlock, who is also adjunct fellow at the University of New South Wales’ Climate Change Research Centre.

He said, to lesser extent, bushfire losses accompany El Niño.

“So you would expect with warmer than normal temperatures, dry conditions and lack of rain, bushfire conducive conditions which are the risk during periods of El Niño,” said Mortlock.

He said, however, that a consequence of the absence of the El Niño effect since 2016 is significant fuel growth across the countryside.

“So there’s that concern there that the landscape is being preconditioned for a strong bushfire season,” Mortlock said.

Lighting strikes and human causes

He also said that while El Niño both exacerbates the risk of bushfire and is conducive to conditions that allow them to get out of control, it doesn’t actually impact the two most common causes.

“Bushfires are actually started half of the time by lightning strikes and the other half are human caused,” Mortlock said. “There’s no indication El Niño impacts either one of those.”

For insurance companies, properties in rural areas are most at risk.

“Obviously, the biggest risk indicator for a property in terms of bushfire risk is distance to bush land,” he said. “It’s often only those that are up against that bush land periphery which were impacted by bushfire.”

The economic losses from bushfires can be devastating.

“As we saw in 2019 and 2020, there’s a hit on tourism, there’s a hit with GDP, there’s a hit on human health and biodiversity loss as well,” Mortlock said. “But if we’re just talking about pure industry insured losses, they certainly tend to be more concentrated and lower compared to floods and cyclones, for example.”

Eight years since the last El Niño

The WMO’s announcement marks eight years since the last El Niño started in 2015, ending in 2016. A WMO report in May predicted a 98% likelihood that at least one of the next five years will be the warmest on record, beating the record set in 2016.

You can go your own way

Interestingly, Australia’s Bureau of Meteorology (BoM) chose not to follow the WMO’s lead and this week maintained its El Niño “alert” status. However, in a release, BoM still forecast warmer and drier conditions across much of Australia for the coming months.

Are you a broker in rural Australia? How are you helping to prepare our customers for bushfire season?

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