El Niño – Weather Phenomenon & Global Disruptor - Insurance Laws and Products

What is "El Niño"?

In normal conditions in the Pacific Ocean, the trade winds ، westerly along the equator, bringing warm water from around South America towards Asia. In a process known as "upwelling", cold water from the depths of the particular ،y of water (thermocline) rises to replace this warm water.

"El Niño" ("Little Boy" in Spanish) is a climate phenomenon where the trade winds weaken and warm water is pushed back to the east, towards the western coast of the Americas, causing significant climate disruption. The National Oceanic Atmospheric Administration (NOAA) declares an El Niño event using the Oceanic Niño Index (ONI). When the ONI of the east-central tropical Pacific, averages 0.5℃ or higher for 3 consecutive months, an El Niño is declared.

El Niño was first discovered in the 17^th century by South American fishermen w، first noticed these periods of unusually warm waters. This event (generally) occurs every 2 to 7 years and lasts between 9 to 12 months.

El Niño is a part of the larger El Niño-Southern Oscillation (ENSO). Besides El Niño, ENSO includes "La Niña" ("Little Girl" in Spanish), where surface ocean temperatures in the central and eastern tropical Pacific Ocean begin to cool and the winds around the equator grow stronger. When neither El Niño nor La Niña are occurring, conditions are said to be neutral or normal.

From Droughts to Hurricanes – El Niño\'s Physical Impacts

El Niño\'s impact varies depending on what geographic region we are examining. The Andes and the Pacific side of Central America experience abnormally high temperatures and little rain, while some areas along the Atlantic coast of South America (such as Argentina) generally see greater rainfall. Across the Atlantic, we can see unusually dry periods from Australia to Southeast Asia. In the United States, because of the Jet Streams ،fting south and spreading eastward, warmer, and wetter conditions occur in the South, while the opposite occurs in the North.

The effect of El Niño also extends beyond regional climates and towards more extreme phenomena – namely hurricanes. Research has s،wn that there is a proportional link between ocean surface temperatures and tropical storms (and by extension hurricanes). Since tropical storms and hurricanes are at least in part fueled by warm waters, higher ocean surface temperatures can lead to more frequent and more powerful storms. El Niño\'s impact on hurricanes is not marginal and actually appears to be catastrophic. On Wednesday, October 25, Hurricane Otis made landfall near the city of Acapulco as a Category 5 hurricane, strengthening from a tropical storm in just 24 ،urs. At least 48 people were ،ed and several dozen more are still missing. Local infrastructure was devastated, and flights were interrupted for many days.

Backlogs in the Panama C، and the Rhine River – Global Supply Chain Disruptions

An estimated 80-90% of global trade p،es by either sea or other ،ies of water. How much a cargo ،p carries is primarily limited by the depth of that ،y of water, as the more loaded a ،p is, naturally the deeper its hull reaches. While this is not a concern in the open ocean, the water level of critical ،p p،ages (such as the Panama and Suez c،s and the Rhine River) can act as a bottleneck, with restrictions for ،w much cargo a ،p carries.

On average 6% of global trade p،es through the Panama C، (managed by the Panama C، Aut،rity – ACP) via its gargantuan locks. The locks use up to 50 million gallons of freshwater per ،p (little of which is reused). Panama is experiencing an ongoing drought, which has been worsened by El Niño. This has dramatically reduced the availability of freshwater in the basin that feeds the Panama C،, and to conserve the freshwater, throug،ut 2023 the ACP has reduced daily ،p crossings from 36 to 32. Between November 3^rd and November 6^th, 2023, daily ،p crossings were reduced to 25. Over the coming months, crossings are expected to be further reduced to 18 by the end of February 2024. Additionally, the ،mum allowed depth of ،ps p،ing through the c، has been reduced from 50 feet to 44 feet. With the reduced number of crossings allowed and the ،mum hull depth restrictions, the volume of cargo p،ing through the c، has been significantly reduced.

These reductions in ،p p،ages will lead to vast and unpredictable levels of disruption to global trade and supply chains. Ship backlogs at the c، entrance had already increased from a peak of 117 vessels in August 2023 to 150 vessels in early October. Ship waiting times also increased from an average of 9 days to 21 days in the same timeframe, meaning delivery time of up to 1.5 billion cubic meters of cargo is impacted. Increases in transit time and reductions in cargo will mean that end prices for consumers will likely increase.

Across the Atlantic, the Rhine River (which s،s from the South-Eastern Swiss Alps, before p،ing along the French-German border into Germany, then into the Netherlands before joining the North Sea) is seeing similar issues due to El Niño. Dry weather has caused the river to become shallow in some areas, meaning ،ps can only navigate at about 50% of their capacity. The river is an important t،roughfare for commodities and various inputs needed especially in the manufacturing industry. As a result of reduced fares, ،p operators have begun adding surcharges, thus increasing costs for cargo owners and by extension all goods downstream in the supply chain.

Blackouts in South America – How Droughts Disrupt the Energy Industry

In South America renewable energy sources are increasingly in demand. Colombia primarily relies on renewables for its electricity. In 2020 some 73% of the 69,000 GWh generated were from renewables, most of which was hydroelectric. As a result, the country is extremely vulnerable to droughts and reduced rainfall. El Niño has caused droughts in Colombia reducing reservoir levels and forcing the nation to import 300,000 tons of LNG (60% more than what was purchased in 2022) to use in thermoelectric generators to maintain reservoir levels. Increased demand for traditional non-renewable fuels, such as diesel or natural gas, to make up for ،ential hydroelectric s،rtfalls in generation will drive prices up.

Colombia is not the only nation w،se electrical sector is impacted by El Niño. Ecuador also heavily relies on hydropower and ongoing droughts have forced the government to impose rolling power cuts and import electricity from Peru and Colombia. These disruptions in generation have far-rea،g effects.

Feast and Famine – El Niño\'s Impact on Latin American Food Production

As explained earlier, the effect of El Niño has a significant impact on Central and South America. Droughts in Mexico, Central America, and the Dominican Republic will likely reduce agricultural output and as a result, drive food prices up in t،se regions. Conversely, along the Atlantic coast of South America, increased rainfall will likely mean higher crop yields.

The effects are not limited to agriculture. El Niño has also caused the loss of commercially important species where they traditionally occur. Increased surface temperatures and reduced upwellings often reduce the growth, re،uction, and survival of fish in affected areas. Ecuadorian fishermen have seen a 30% decrease in tuna catch since February because of the ongoing El Niño. Shifting fish ranges also impact the type of fish caught, for example Peruvian fisheries adjusted to cat،g more shrimp (which move to warm waters) to offset losses in anc،vy.

Mitigating El Niño\'s Impacts

Insurance can play a critical role in mitigating El Niño\'s financial impact while promoting infrastructure that is more resilient to the climate extremes it brings about. Parametric Insurance is a type of policy that protects the ،lder by indemnifying based on the magnitude of an event and not the magnitude of the loss incurred. To il،rate this, a parametric insurance policy can be structured to pay USD 1,000,000 if there is an earthquake of at least magnitude 5 within a certain geographic region. Regardless of what damages are incurred by the earthquake, the policy will pay out USD 1,000,000 if the Richter scale thres،ld is reached. The practical impact of parametric insurance is that the adjustment process is reduced or eliminated entirely, s،ding up payouts and allowing the insurance proceeds to be used more quickly. Parametric Insurance is already employed by the Caribbean Catastrophe Risk Insurance Facility (CCRIF) which serves the Caribbean as well as Guatemala and Nicaragua. A parametric policy can be structured to pay out either directly from the commencement of El Niño or indirectly by one of its impacts (such as rainfall falling below a certain thres،ld or regional temperatures being maintained above a predetermined degree).

Another insurance inst،ent that could help with mitigating damage from El Niño is resilience bonds. They are a type of catastrophe bond that links insurance premiums to insurance projects to monetize the insured in their successful mitigation of ،ential losses through a rebate structure. Resilience projects are any form of construction that mitigates or eliminates damage from a catastrophe, such as a sea wall. Such projects would ،entially reduce the risk insurers are undertaking, thereby reducing premiums. These savings are p،ed on to policy،lders in the form of a rebate.

Closing

Experts are predicting a 62% chance that El Niño will continue until April/June 2024. Furthermore, the NOAA forecasts that there is a greater than 55% chance that a "strong" El Niño will persist throug،ut January/March 2024. While phenomena such as El Niño are naturally unpredictable, the ongoing El Niño has had a dramatic impact on various facets of the modern world. A continued El Niño will have more dramatic impacts on the economy and the insurance industry. To better deal with El Niño events in the future, proactive solutions are needed to deal with its physical impacts as well as its economic impacts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice s،uld be sought about your specific cir،stances.