Brought to you by:

La Nina declaration points to wet summer, floods

Facebook Twitter LinkedIn Google

Australia will experience a La Nina for the second year running after the Bureau of Meteorology (BOM) last week declared the flood-inducing weather pattern was now underway.

La Nina years have historically been more costly for the insurance industry due to more extreme rainfall and elevated cyclone formation risk.

BOM says the current La Nina, expected to persist until at least the end of January, will be weaker than last year but is still capable of bringing heavy rainfall.

Head of Operational Climate Services Andrew Watkins says La Nina typically leads to wetter-than-normal periods for eastern, northern and central parts of Australia.

This year the risk of flooding has increased given the deluge of heavy rainfall that has occurred in recent weeks.

“The issue at the moment is that we already have quite wet soils, quite full rivers and quite high catchments ... so any further rainfall raises the risk of widespread flooding, particularly in south-eastern Australia,” Dr Watkins said at a press conference last week.

“[But] the good news about La Nina is it tends to reduce the bushfire risk at least in terms of those big wild bushfires that we saw a few years ago.”

Dr Watkins says the last significant La Nina event was in 2010 to 2012.

“This strong event saw large impacts across Australia, including Australia’s wettest two-year periods on record, and widespread flooding,” he said

Providers of parametric products say the likelihood of increased extreme weather could potentially lead to more interest in the non-conventional insurance offerings, which pay out pre-determined amounts if certain triggers for an insured event are met.

Sydney-based Epsilon Underwriting Agencies Chief Underwriting Officer Paul O’Leary says the business has seen an increase in the number of enquiries for its parametric products in the last couple of months leading up to the cyclone season.

“The point around La Nina is that we are going to see increased rainfall right along our eastern coast and that could potentially cause havoc to the agricultural industry through either destruction of crops or significantly reducing yield,” he told insuranceNEWS.com.au.

“Parametric is not only available for cyclone but also for the effects that higher than usual rainfall might have on a farmer’s yield.

“Farmers can tailor the cover to insure for the period of time their crop is most exposed.”

He says parametric is not the answer to everything but it’s “certainly a piece to the puzzle” in addressing catastrophe exposures in Australia.

New Zealand start-up Bounce, which launched a parametric earthquake offering in the country earlier this year, also sees opportunities for such products to grow in the coming years.

“As there is an increase in the frequency of these type of weather events then we may start to see reduction in traditional insurance capacity in some regions alongside an increase in premiums,” founder and CEO Paul Barton told insuranceNEWS.com.au.

“This may create opportunities for alternative forms of risk transfer such as parametric insurance to support communities and close the gap.”

He says there are many benefits of a disaster risk financing solution like parametric insurance. These include speed of payment, simplicity and transparency as well as broad coverage.