Financial services, especially insurers and commodity markets, can make better risk decisions thanks to increased scientific knowledge about the twin climate cycles, El Niño and La Niña, according to research commissioned from the Met Office by the Lighthill Risk Network.
“The importance of El Niño and La Niña events is two-fold: they shift the risks of damaging hazards in recognisable ways and they are predictable about six months in advance,” said the authors from the Met Office in the report, ‘Global Impact of El Niño and La Niña Implications for Financial Services’. “Clearly the periodic reduction of risk offers economic and societal benefits that, if known in advance, could be exploited.”
Because of the implications for property, agriculture and transport infrastructure, Lighthill Risk Network asked the Met Office to define and describe the cycle of El Niño and La Niña episodes and the impacts that are most relevant to the finance industry globally, in particular severe rainfall and tropical storms.
During the 2010/11 La Niña episode, the state of Queensland in Australia suffered losses estimated at US$5.5bn, including devastation of the state’s important sugar cane crop, disruption of coal mining and wheat transport, and extensive property damage.
The best-documented impacts are those associated with the very strong El Niño event in 1997/98, which was followed by an extended La Niña episode covering the next two years. US agriculture sector losses from the El Niño were estimated at US$1.5-$1.7bn and those from the subsequent La Niña between US$2.2 and US$6.5bn.
In Kenya, the El Niño damages were estimated at 11% of GDP. Conversely, La Niña caused drought damage to the extent of 16% of GDP in each of 1998/99 and 1999/00 financial years. While these impacts were unusually large, they give an idea of the range of consequences – and they may occur again, said the Met Office.
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