Say Goodbye to the Big Wet and Excessive Losses

This report is based on a briefing note “Will La Niña’s influence and flooding rains endure in Australia over the coming decade or are we in for a surprise return to drought?” authored for Aon by Dr Ian Goodwin, ClimaLab. Additional analysis linking the findings of the research to historical insured losses was undertaken by Aon.

The Big Wet

Eastern Australia is now into its third consecutive La Niña year – only the fourth triple La Niña since 1900 and the first in 22 years[1]. This has led to consecutive and persistent flooding for the past two years, culminating in 2022 being Sydney’s wettest year since records began[2]. Current industry-insured losses from the February/March floods are at AUD5.57 billion[3] and rising.

La Niña is one of the main drivers of loss volatility from weather perils. Analysis indicates that ~65 % and ~80 % of all cyclone and flood losses, respectively, have occurred during periods of La Niña since 1967.

Pacific Decadal Variability

Underpinning La Niña is the slower-paced climate system called the Pacific Decadal Variability (PDV). The PDV determines whether La Niña or El Niño weather events are strong or weak. The Pacific Ocean Basin has been in a sustained La Niña-like phase of the PDV since 1998. Our analysis shows a AUD$1.61 billion increase in mean annual loss during PDV-negative (La Niña-like) years versus PDV-positive (El Niño-like) years. Therefore, it is a key, yet relatively unknown, driver of decadal loss volatility in Australia.

A Phase Shift in our Climate

Has the current triple-dip La Niña event pushed the Pacific climate into a drought cycle? Our analysis suggests it is about to. The current PDV Index is equivalent to the strongest negative values (La Niña years) on record. In addition, the build-up of upper ocean heat content in the subtropical south-west Pacific means the PDV is nearing a tipping point, where a moderate El Niño event in the 2023-2025 period could flip the PDV to an El Niño-like phase for the ensuing decade. Therefore, there is a high likelihood that the current triple-dip La Niña may be the precursor to the PDV flipping to an El Niño-like decadal state.

Why a Big Dry May Mean Reduced Insurance Losses

The historical loss record shows that periods of El Niño – in comparison to La Niña – are associated with reduced flood, cyclone and overall losses. Therefore, a sustained decadal period of El Niño-like conditions would potentially exert downward pressure on insurance losses.

La Niña may not be done with us yet – 2022/23 still has the potential for elevated losses – but if we look at the local climate record and global model forecasts, a compelling story emerges post-2023 with the big wet becoming the big dry, potentially reducing insurance losses. While the PDV is a relatively unknown quantity to (re)insurers, it has the potential to lock in the persistence of certain types of weather for Australia’s east coast and is an important factor to consider.

For deeper insights download the full report, prepared in collaboration with ClimaLab.

[1] Bureau of Meteorology [BoM] (2022). Australian rainfall during El Niño and La Niña events (bom.gov.au)

[2] Bureau of Meteorology [BoM] (2022). Climate statistics for Australian locations (bom.gov.au)

[3] Insurance Council of Australia [ICA] (2022), as at November 2022. Data hub – Insurance Council of Australia