WILLIS RE CATASTROPHE MANAGEMENT SERVICES

Return of the Damned Child:

Uncertainty in ENSO Prediction, Climatic Impacts and Insurance Implications

By: Alexander Pui

Outline

How predictable is ENSO?

What are its climatic impacts?

What are its economic and insurance implications?

How to develop an ‘ENSO-readiness’ plan?

3

HOW PREDICTABLE IS ENSO?

Section Outline

What is ENSO?

What are the key ‘Ingredients’ for an El Niño?

How do we know an El Niño has occurred?

What are the complexities of ENSO?

How accurate are ENSO predictions?

4

What is ENSO?

El Niño Southern Oscillation

A global climate phenomenon that describes changes in

both the ocean and atmosphere.

Has 3 states:

– El Niño

– Neutral

– La Niña

5

ENSO state (Neutral)

Schematic of ENSO during neutral state (neither El Niño or La Niña)

Source: BOM 2011

West (Warm)

East (Cool)

Walker Circulation

SSTA in Nino 3.4 region

Nino 3.4

SSTAs in Nino 3.4 region

Cool ENSO state (La Niña)

Schematic of ENSO during La Niña state : Note warmer SST and increased

convection in the West Pacific Ocean.

Source: BOM 2011

SSTA in Nino 3.4 region

West (Warmer)

East (Cooler)

Nino 3.4

Warm ENSO state (El Niño)

Schematic of ENSO during El Niño state :

Note warmer SST and increased convection in the West Pacific. Source: BOM 2011

SSTA in Nino 3.4 region

East (Warmer)

West (Cooler)

Nino 3.4

Key Ingredients for an El Niño

Westerly Wind Bursts

Spread of Sea Surface

Ocean Warmth

Spread of Sub Surface Ocean

Warmth Source: NOAA

Evolution of current El Niño

Note spread of Pacific Ocean warmth towards the West Coast of American Continent

Source: NOAA

Different ‘Flavors’ of El Niño

11

East Pacific/Classical El Niño

Hybrid El Nino

Source: NOAA

Central Pacific / Modoki (もどき) El Niño

2. Find Covariance Matrix of Y

1. Let Y = SSTA Field in Space & Time

3. Solve Eigen Equation for C

…AND HOW ARE THE PATTERNS & INDICES OF THESE ‘ FLAVORS’ DERIVED?

Where,

e1 =1st EOF / Classical Pattern

e2 =2nd EOF / Modoki Pattern

(~52%Variance Explained)

.

(~11%Variance Explained)

.

Has an El Niñodeveloped?

Is the monthly

Nino 3.4 SSTA

>= 0.50 C? NO

Not El Niño

Conditions

YES

Will SSTAs stay >= 0.50 C

for next few seasons?

Insufficiently

weak Walker

Circulation

YES

What does

atmosphere look

like?

El Niño

Conditions!

Indication of

weak Walker

Circulation

(i.e.

atmospheric

response!)

NO

Source: NOAA

13

IPO (inter-decadal

variations)

NOISE

Internal

Variations (i.e.

Modoki)

Annual Cycle

(i.e. Seasons)

ENSO

Adapted from: Axel Timmerman,2015

COMPLEXITIES OF ENSO

14

IPO (inter-decadal

variations) Annual Cycle

(i.e.Seasons)

NOISE

Internal

Variations (i.e.

Modoki)

ENSO

COMPLEXITIES OF ENSO

(ICE AGE)

15

IPO (inter-decadal

variations) Annual Cycle

(i.e. Monsoon)

NOISE

Internal

Variations (i.e.

Modoki)

ENSO

COMPLEXITIES OF ENSO

(GLOBAL WARMING)

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COMPLEXITIES OF ENSO

(ORBITAL CYCLES)

How accurate are climate crystal balls?

2010-11 La Niña

2014-15 El Niño

Model ‘Hit’?

Model ‘Miss’?

Source: IRI (Columbia University)

Who Killed the 2014 ‘Super’ Niño?

18

SSTA at Time of Prediction

Outcome

April 1997

April 2014

September 1997

September 2014

Adapted from: M.McPhaden,2015

Predictions not perfect, but still useful

19

Model View

Odds of La Niña following strong

El Niño?

Source: NOAA

20

REGIONAL CLIMATIC IMPACTS (ASIA PACIFIC)

Rainfall (El Niño)

21

Historical Rainfall Anomalies (Sep-Nov, 1901: 2013)

Less Rain

More Rain

Dry Conditions in

Indonesia and East

Australia

Dry

Conditions

in Northern

India

Source: KNMI

Rainfall Anomalies (Jul – Sep 2015)

Temperature (El Niño)

22

Seasonal Temperature Anomalies (Dec-Feb)

Warmer

Cooler

Warmer in Thailand ,

Malaysia and East

Australia

Warmer in

India

Source: KNMI

Forest Fires and Drought (El Niño)

23

2015 Indonesian Haze Event

24th Sep 2015 NASA

terra satellite image of

Peat Forest Burning

Source: NASA

Reduced Visibility

Levels rivalling that of

1997 record haze year

Bushfires in Australia (El Niño)

24

Canberra 2003 Fires co-occuring with the 2002-2003 El Nino Modoki.

Decreasing Trend

in Soil Moisture to

exacerbate

Bushfires?

Bushfire Risk heightened

during El Nino, +ve IOD (or

both co-occuring)

Source: Cai et al., Positive Indian Ocean Dipole events precondition South East Australia Bushfires, GRL, 2009

Typhoons (All Years)

25

Largest ACE since

1976

The Pacific is primed for a

very active Typhoon season.

(give e.g. of elapsed

Typhoons thus far)

6 tropical cyclones at once!

.

Source: Phil Klotzbach (Colorado State via RMS)

Cyclones (East Australia)

26

Source: KNMI

Feature

Frequency

Genesis Location

Track Bias

Intensity

Cyclone Lifespan

Unknown?

Lower

Unknown?

Coral Sea (SW Pacific) Cyclone Characteristics during El Nino

Response

Lower

North East Shift

Source: Wang, G., and H.H. Hendon, 2007: Sensitivity of Australian rainfall to Inter-El Nino variations. J. Climate, 20, 4211-4226.

Impacts on Rainfall

are different

Max. SSTAs at

different locations

Differences in rainfall

response according to

position of maximum

SSTAs.

Uncertainty in ENSO impacts (Rainfall)

Source: Risbey et al. On the Remote Drivers of Rainfall Variability in Australia, Monthly Weather Review, 2009.

Max. SSTAs at

different locations

Uncertainty in ENSO impacts (Rainfall)

Strength of correlation between

rainfall and SOI index (proxy for

ENSO activity). Note differences in

extent and strength of correlations

at different periods of time.

Reinforcing Climate Drivers (Australia)

29

‘3 Headed Dog’ :

ENSO

IOD

SAM

Joint Impact of the ‘3

Headed Dog’ during 2011

Brisbane Floods:

ENSO (La Niña)

IOD (-ve phase)

SAM (-ve phase)

Source: Risbey et al. On the Remote Drivers of Rainfall Variability in Australia, Monthly Weather Review, 2009.

Climate Change Factor

Increased frequency of extreme

ENSO events?

Extreme = 101 Extreme = 212

Increased risk of coastal

flooding from storms/ cyclones

due to sea level rise?

Source: Cai et al. 2014,Increasing frequency of extreme El Nino events due to greenhouse warming, Nature

Pole-wards migration of

cyclones/hurricanes?

31

ECONOMIC IMPACTS &

RISK MANAGEMENT STRATEGIES

Section Outline

32

Is there evidence of ENSO signature in property, BI and

crop economic costs?

How to incorporate ENSO into risk management and RI

decisions?

Other Applications

Economic costs of ENSO (Property)

33

Event El Niño Neutral La Niña Total

Bushfire 2 1 1 4

Cyclone 3 1 6 10

Hail 4 2 4 10

Flood 0 0 4 4

Storm 3 2 2 7

Non-Bushfire 10 5 16 31

Total 12 6 17 35

Count of Seasonal Natural Catastrophe Events

Exceeding $500M AUD in 2015 Values - By ENSO Phase

Source: Prepared by Ned Scandrett, using ICA data (1967 – current)

Higher Losses in La Niña and

El Niño years compared to

Neutral.

Differences especially stark

after considering ‘residence’

time spent in each ENSO

phase.

Economic costs of ENSO (BI)

2011 Thai Floods (La Niña)

4th costliest disaster (approx.

USD 45-50B economic loss)

USD 15-20B of which is

insured, and;

80% Supply Chain Related

34

Ayutthaya

Aerial view of Honda vehicles at the flooded Honda factory in the Rojuna Industrial district, Nov 2011.

Source: Bloomberg

Neutral years tend

to experience best

yield outcome (with

the exception of

Soybean).

Economic costs of ENSO (Crop)

35

Source: Izumi et al., Impacts of ENSO on the global yield for crops, Nature 2014

El Nino

La Nina

Neutral

ENSO is predictable - impacting climate and

economic costs!

How can we leverage this knowledge to

hedge financial risk?

ENSO to support technical risk view

36

‘Best’ view of risk

• Exposure Analysis (e.g. RMS Cat Modelling)

• Experience Analysis

• Climate Variability

Technical Technical/Commercial

Risk Appetite

• How much risk to take?

• Shareholder expectations

Capital Requirements

• How much RI purchased?

• Regulatory Requirements

Commercial

RI Quotes

• Soft/Hard Market?

• Relationship with Reinsurers

ENSO INPUT

ENSO to support technical risk view

37

1 in 200 year event

(w/o ENSO

considerations)

1 in 100 year event

(with ENSO

considerations)

+50%

Example of Short Term RI Strategy

38

Hypothetical Property Biz

• Fixed Capital of $250m

• XOL reinsurance

• Constant P(ruin) = 0.1%

• Ruin if losses > 30% net worth

Idealized Hurricane scenarios

• Quiet vs Active Seasons

• 1000 realizations, each 100yrs

• Wind Damage only

Source: Emanuel et al. 2012: Potential Economic Value of Seasonal Hurricane Forecasts Weather, Climate and Society, Vol 4, 110 -117

‘Baseline’ vs ‘Strategic’ scenarios

39

RI Program Options

Baseline (Control)

*Retains $30m every year Strategic

Perfect

*Forecast 100% correct

*Retain $18m ($119m) if

active(quiet) years

Imperfect

* Forecast 60% correct

*Retain $28m ($50m) if active

(quiet) years

Source: Emanuel et al. 2012: Potential Economic Value of Seasonal Hurricane Forecasts Weather, Climate and Society, Vol 4, 110 -117

‘Baseline’ vs ‘Strategic’ revenue

40

Distribution of accumulated revenue

after 50 years for control, flawed

and perfect forecasts.

Baseline

$39m

Strategic

(Perfect)

$136m

Strategic

(Imperfect)

$63m

Source: Emanuel et al. 2012: Potential Economic Value of Seasonal Hurricane Forecasts Weather, Climate and Society, Vol 4, 110 -117

Reinsurance Treaty Inception Dates

41

Jan (Y2) Jan(Y1) Jan (Y3) Predictability

Barrier

Early

Year

Inception

Mid Year

Inception

Peak Bushfire/Flood Season

Window of

(arbitrage)

Opportunity?

Time window to consider:

Increase Limits?

Lower Retentions?

Additional Sideways

Protection?

Reinstatements?

Longer Term Strategies

Multi-year Reinsurance Contracts

Hedge against price hikes

42

State IPO + All IPO -P(Niño|Niño) 17% 10% 0%

P(Niña|Niño) 42% 33% 22%

P(Niño|Niña) 31% 29% 25%

P(Niña|Niña) 15% 25% 38%

How likely are back-to-back adverse ENSO events?

Source: Pui et al. 2015, Representing low frequency variability in continuous rainfall simulations, Journal of Hydrology (submitted)

Other Applications

Reduce volatility in earnings through Natural Perils

‘allowance’

Underwriting (Embargoes, pricing adjustments)

Claims Handling (Event Response Capability)

43

Conclusion

ENSO is predictable up to 9 months in advance*

ENSO has quantifiable impacts on climate and ensuing

economic costs.

Insurers should incorporate ENSO in risk management

decisions and when formulating business strategies.

44 * In a probabilistic sense

Subtitle 1

Subtitle 2

Subtitle 3

WHAT IS YOUR 2015-16 ENSO STRATEGY GOING TO BE?