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Economic losses for global drought expected to exceed $8bn in coming months

Worldwide economic drought losses are expected to surpass $8bn as El Niño continues to intensify in the coming months, according to a reinsurance broker.


4 SEPTEMBER 2015 | BY CINTIA CHEONG 

El Nino © NOAA
El Niño continues to intensify in the coming months, says Aon Benfield. © NOAA

Aon Benfield’s monthly catastrophe report said in the US, severe drought conditions in August caused the country at least $3bn of losses, with the agriculture sector in California facing the greatest impact.

Drought also affected Eastern Europe, Africa, the Caribbean and Central America last month. Romania, Czech Republic, and Poland announced combined economic losses of more than $2.6bn.

Steve Bowen, Impact Forecasting associate director and meteorologist, said: "As we continue to see the prospect of El Niño becoming one of the strongest in decades, more and more impacts will be apparent around the world. This is already true in the form of global drought losses, as several countries have endured a severe lack of rainfall and agricultural impacts. 

“On the flipside, tropical cyclone activity in the Pacific Ocean maintained its torrid pace in August due to above-average sea surface temperatures and favorable atmospheric conditions. Multiple landfalling storms in Asia-Pacific left considerable damage, and more activity is expected as we enter the peak of the cyclone season."

El Niño is one part of a cycle of sea temperatures in the Pacific that affects weather patterns. 

Meanwhile, credit rating agency Standard and Poor’s (S&P) found two years of low claims in the reinsurance sector has led to the “recent downward trend in catastrophe risk pricing”, thus softening the reinsurance market.

The agency said that catastrophe losses in 2014 cost insurers $35bn, around half the 10-year annual average of $64bn in the reinsurance industry. 

In a report analysing reinsurers’ reaction to catastrophe risk, S&P said firms’ attitudes were “diverging”. While most reinsurers’ exposure to catastrophe risk has contracted, a few are taking on more exposure this year. 

According to S&P, lower pricing has made firms more vulnerable to large catastrophe claims.

Based on S&P’s stress tests, the most exposed reinsurers were London-based firms due to “lower capital adequacy” and North American players that have “larger-than-average” appetites for catastrophe risk. 

“We consider underwriting profitability in the sector likely to become more vulnerable to natural catastrophes; therefore, we anticipate that operating performance could deteriorate at reinsurers that are more exposed,” said S&P.