Insurance alone cannot protect LatAm from El Niño & La Niña disruption: Swiss Re

To increase resilience, both adaptation and mitigation are needed in Latin America as insurance alone cannot help protect the region from disruption caused by severe weather events brought by El Niño and La Niña, which will also test the long-standing protection gaps, the Swiss Re Institute states.

Weather projections suggest a return to El Niño-Southern Oscillation (ENSO) neutral conditions – starting in May -, at the same time experts predict there is a more than 80% chance of swift transition to La Niña in late summer and the fall.

The ENSO is a climate phenomenon of irregular variations in sea surface temperatures (SSTs) in the Pacific Ocean, known as El Niño when warmer, and La Niña when cooler.

According to the Institute’s research, the combination of these two weather conditions is a rare event that is expected to hit Latin America this year, a region that is particularly exposed to the extreme weather conditions that ENSO can trigger.

According to data, since 1950, only in 1973 and 1998 have there been just one 3-month period of ENSO-neutral conditions between the two.

“The severe weather events brought by El Niño in 2023-24 and potentially also by La Niña in the summer will likely accentuate already-high agriculture and property protection gaps across the region. Further, a swift transition to La Niña could prolong a three-year period of high inflation as food and energy prices become subject to a supply shock,” the Swiss Re Institute highlighted.

The 2023-24 El Niño has brought heat waves to Brazil, wildfires to Chile, Argentina, and Colombia, and floods in several others. In Brazil and Peru heavy rainfall and warmer weather has created optimal mosquito breeding conditions, with record high dengue cases and declaration of a national sanitary emergency.

Though near its end, El Niño has caused torrential rains in the last week that have struck southern Brazil, causing deaths, floods, mudslides and dams to collapse.

At the other extreme, in 2023-24 Panama has seen unprecedented droughts, which has caused low water levels in the Canal, disrupting a key global trade route.

ENSO can trigger extreme weather events with global reach. Variations in commodity exports due to ENSO weigh on growth and inflation; moreover, disruption to agriculture weighs particularly heavily on rural communities.

In 2021/22, the last La Niña caused record droughts in Latin America, resulting in crop yield shortfalls and, in turn, higher global food prices. For example, in Brazil agriculture insurance claims increased 47% in 2022.

“For Latin America, our estimates show crop resilience (34%) has improved since 2016 due to higher insurance penetration and government policies to promote uptake. However, the index is still well below the global average (41%), with an estimated USD 6 billion crop protection gap in premium equivalent terms,” the Swiss Re Institute explains.

Adding: “For Brazil and Mexico, our weather-related insurance resilience indices are 10% and 18%, respectively, well below advanced economy levels (eg, US (53%); Switzerland (80%)), but also lagging emerging market peers like South Africa (20%) and Turkey (30%).”

The effects of ENSO climate events are non-linear and heterogeneous, but typically entail damage to infrastructure, weaker growth and inflationary pressures, according to research.

“The timing of this year’s anticipated back-to-back ENSOs could prolong the remnants of a three-year-long fight against inflation. We expect the disinflation trend in the region to prevail, but with added bumpiness. Our estimates show that, a +/- 1°C anomaly in SSTs can add anywhere between 0.24 and 0.47 ppts of annualized headline inflation to the region,” analysts noted.

For insurers, the direct impact of food and energy inflation should be small. However, experts warn, the second-order effects on core CPI via wage growth would add to claim costs for some non-life lines of business.

Analysts suggest that insurance products like parametric solutions can facilitate swift recovery of economic losses. However, increasing resilience, building adaptation and loss mitigation measures are also needed, the Institute concluded.

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