A Balancing Act



This report examines opposing factors currently affecting natural catastrophe (nat-cat) portfolios. Favourable pricing tailwinds and a change in the El Niño Southern Oscillation (ENSO) cycle are currently positioned against headwinds, including higher risk transfer costs and a return to an inflationary world. Higher retentions mean cedents bear, on average, a greater risk burden.

Past experience suggests the transition away from a multiyear La Niña cycle will likely, overall, be favourable from a global insured loss perspective. Our analysis in this report shows that tailwinds are more likely to outweigh market headwinds, particularly for reinsurers, who may see a material boost to profitability. However, the effects of climate change and increased volatility remain to be quantified, thereby moderating confidence levels.

1.1 A shift to El Niño: history points to reduced hurricane frequency

El Niño Southern Oscillation (ENSO) cycles can profoundly impact the prevalence, location and strength of North Atlantic hurricanes as well as Southern Hemisphere cyclones and inland floods. During the second quarter of 2023, the cycle transitioned to El Niño, replacing the previous twenty-four months of La Niña, which ended in March.

El Niño episodes are usually associated with a southerly shift in the jet stream, creating cooler weather, particularly in the south-eastern United States, as well as wetter conditions on the Gulf Coast. If 2023- 2024 follows a typical El Niño year, a reduced hurricane frequency impact is possible, with reduced loss activity resulting. However, as has been well reported, this season is complicated by the opposing force of significantly above average sea surface temperatures. Hurricane Idalia, along with the active 2023 Hurricane season thus far, underscores this uncertainty.

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