El Niño and La Niña - are you prepared?

18 August 2016

El Niño, La Niña: what they mean for your business

With the world’s weather expected to flip from an El Niño pattern into a La Niña cycle, are you ready for the potential impact? 

In 2015 there were 346 natural disasters around the world, claiming 22,773 lives, according to USAid. 

The largest disaster in terms of mortality was the earthquake in Nepal. However, compared to previous years, most notably 2011, the economic and insured cost of natural disasters was not as high at around $66.5 billion.

Many of the events were caused as global weather patterns deviated from climate norms. Extreme weather events, including many attributed to the El Niño phenomenon, also caused supply chain disruptions and threatened business continuity in multiple regions, revealed the British Standards Institution’s global supply chain intelligence report.

Changing cycles

The top-five natural disasters in 2015 caused $33 billion of damage to businesses, the report concluded.

Although those are not all directly attributable to the El Niño phenomenon, the recent wildfires around Alberta in Canada have been attributed to a perfect storm of weather factors, resulting from the El Niño pattern. The warm winter, combined with an early snow melt and the traditional high winds resulted in weeks of wildfires. 

The consequent evacuation of the oilfields that accounts for nearly 25 per cent of Canada’s oil production (800,000 bbl/day at peak production) will have considerable business interruption cost. Considering production was offline for approximately three weeks, at $40/bbl, that equates to roughly $675 million of lost production.

Last year’s pattern is set to change in 2016, however, as the world’s weather flips from an El Niño pattern into a La Niña cycle

The speed of this change will affect the regional impact of natural catastrophes later in the year, says Josh Darr, Senior Vice President and Lead Meteorologist, Catastrophe Exposure and Risk Management Services at JLT Re (North America).

Although predicting the weather contains a measure of uncertainty, the signs all herald a quick change between the two climate regimes, says Darr. 

Food shortages

The flip from El Niño to La Niña could affect food distribution – a growing global concern. 

The Group on Earth Observations’ US Co-Chair, Dr Kathryn Sullivan, Administrator of the US National Oceanic and Atmospheric Administration (NOAA), recently stated: “Concerns over food and water security are rising globally. Ensuring agricultural industries around the world have access to the best science, data, tools and resources is essential as we work to increase food security and mitigate the effects of droughts and floods.”

La Niña shifts the jet stream north during the summer growing season, increasing the risk of hot and dry weather across portions of the Northern Hemisphere agriculture belts. Too much sun and too little rain could spell problems for regions such as the central US, the Chinese corn belt or for portions of Europe eastward through the Russian grain belt.

The last time a strong La Nina took hold, for example, Russia was forced to stop exporting wheat, resulting in massive price hikes for its main customers across the Middle East in 2011, notes Darr. “A lot of research suggests this ultimately played a role in the start of the Arab Spring.” 

But it is not necessarily all bad news: a La Niña event typically also brings a beneficial Indian monsoon season, with plenty of rain to provide a good harvest there.

Hot water

Warmer sea waters have also had an impact: for example, in the southern Pacific aquaculturists have been hit hard by an algae bloom, which has destroyed millions of farmed salmon, already resulting in $800 million of losses.

Most of these farms were insured, thanks to a high degree of sophistication among the owners. But there are concerns for those further along the supply chain who are often removed from the physical trigger required by many insurance policies.

The power sector faces similar issues. Changing weather patterns impact both supply and demand. A La Niña event could help hydro power stations in areas like India, as rains begin to fall, Darr says. 

However, a lack of water in parts of the northern hemisphere, due to an exceptionally warm spring and early snowpack melt, could limit supply of hydro power, at a time when demand for air conditioning and refrigeration peaks.

“For a power station this can mean increased cost of fuel or lack of supply, though heavy rain can flood mines and flood plants,” says Christopher Taylor, Account Handler, Property, Casualty, Mining and Power at JLT. “The inability to supply can also affect power purchase agreements."

Conversely, mild winter and cool summers can reduce the need for heating and air-conditioning and substantially reduce expected revenue. 

Innovation is key

Given the economic consequences of volatile weather patterns, clients need bespoke weather solutions that form agnostic, nimble and affordable protection in a variety of landscapes. 

For example, an unexpectedly warm US winter in the North East resulted in lower than average coat sales, as retailers built up large inventories and cut prices drastically. A bespoke weather solution could smooth out a client’s revenue by hedging its weather volatility. In other terms, clients benefit from a capped exposure for often regular weather events. Such products are efficient in terms of both time and cost, which allows for ease of execution.

The application of bespoke weather solutions is broad and currently being explored globally and across various industries, such as agriculture, logistics, marine, construction and development, and energy and renewables. 

For instance, a product for a utility company could be structured to trigger when the following events occur simultaneously: 

  • A forced power outage lasts for a specified period of time, 
  • When the temperature is drops below a certain threshold, 
  • The price of electricity is over an agreed upon value. 

This solution is an example of how a weather product could assist a utility company with forced outages at times of peak demand in the energy markets.

Perfect storm 

Ryan Fitzpatrick, COO at Jardine Lloyd Thompson Capital Markets, says: “The flexibility of our solutions – often taking various form as either traditional policies, swaps [risk for premium], or even bonds – provides clients with a cost efficient, innovative risk transfer structure. 

“For instance, some of our products feature a two-way payment with multiple triggers. That structure offers a different way of thinking about risk transfer than the traditional premium and payout model. 

“If a client is concerned with aggregate weather events that may be linear or non-linear, then a two-way payment structure may be the most elegant way of dealing with this weather issue. Other innovative structures can utilise secondary triggers such as commodities. For example, sugar producers could benefit from a product that triggers if rainfall is under a certain threshold and the price of sugar is above a predetermined value.” 

Lastly, bespoke parametric structures can not only transfer weather-related risks but can also limit business interruption, contingent business interruption and even community interruption. Other solutions can have multiple-triggers, which limit exposures. 

Fitzpatrick finds that innovation is often the key to covering volatile natural events. He believes the challenge often lies in a combination of events, leading to a perfect storm.

“A corporation’s supply chain, stockpiles, assets and potential sales can all be impacted indirectly by weather events – and not necessarily extreme events but those just outside normal parameters,” says Fitzpatrick.

“Accessing the capital markets to provide innovative solutions to cover all bases is gaining momentum. Traditional insurance can leave gaps in cover, whereas the capital market solutions look to plug those.” 

El Niño, La Niña 

El Niño and La Niña are opposite phases of what is known as the El Niño-Southern Oscillation (ENSO) cycle. La Niña is sometimes referred to as the cold phase of ENSO and El Niño as the warm phase of ENSO. El Niño and La Niña episodes typically last nine to twelve months, but some prolonged events may last for several years. El Niño and La Niña events occur on average every two to seven years. “Since the early 2000s, the global climate has been more conducive for La Niña events. In the 1980s and 1990s ocean and atmospheric conditions were more conducive for strong El Niño events.

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For furhter information, please contact Josh Darr, Senior Vice President and Lead Meteorologist, JLT Re on +1 312-637-6108 or email josh.darr@jltre.com