Could El Nino Push P&C Insurance to the Brink?

July 5th, 2023 | Carly Cascio

The El Nino-Southern Oscillation (ENSO) is a climate phenomenon where the water temperatures in the equatorial Pacific Ocean fluctuate between warm and cold. The warming phase of the sea temperature is known as El Nino, whereas the cooling phase is known as La Nina. The two periods last for several months and typically occur every few years with varying intensity. Up until recently, we were experiencing La Nina conditions, then the temperature shifted to neutral, and finally on June 8th, 2023, the National Oceanic and Atmospheric Administration (NOAA) officially declared the arrival of El Nino.

So what does this mean for insurance? Well, despite the geographical distance, the ENSO has the potential to substantially impact weather in the US. Historical data has shown that El Nino contributes to events like increased rainfall, flooding, higher than normal temperatures, storms, and tornadoes. Additionally, these scenarios also depend on the strength of El Nino. Currently, there’s a 56% chance that El Nino will develop into a strong event, with an 84% chance of at least a moderate one. Coupled with the additional intensity driven by climate change; these weather events could be a big deal.

Here’s how insurers may respond before they occur:

1. A strong El Nino could mean an increase in flooding for the southern parts of the US, which could also mean an increase in rates for flood insurance and auto insurance within affected areas. FEMA recently raised the rates for its National Flood Insurance Program (NFIP), causing ten states, including Florida and Louisiana, to file lawsuits in response. One could argue that there’s an opportunity for private insurers to offer consumers a better option, but reinsurers have taken a significant hit over the past few years from both catastrophic weather events and rising supply costs for the materials needed to rebuild. 
2. El Nino could also cause drier conditions in the northern US, which leads to more wildfires. This, in turn, could heighten premiums for homeowners insurance and crop insurance. Earlier in May, State Farm stopped accepting applications for homeowners insurance in California, citing “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market” as its reasons for withdrawal. Allstate later followed suit for similar reasons, although it had already put a pause on accepting Californian applicants in 2022. 
3. El Nino’s warm waters lead to warmer temperatures around the globe, which will generally amplify storms everywhere and could lead to rises in premiums across the board. Add that in with the rising temperatures from climate change and we are looking at record-breaking numbers. Places that don’t see as much in terms of catastrophic weather events may be completely blind-sided by storms bigger than what their infrastructure can handle.

It’s important to note that weather is complicated and impacted by more than just the ENSO. There are other factors such as temperature, humidity, atmospheric pressure, wind, precipitation, and cloudiness. We don’t have a way to predict the weather with 100% accuracy. We do, however, know that the climate is getting warmer because of human activity and that warmer weather means more extreme weather events. It’s entirely possible (at this point probable) that areas of the country will become uninsurable. One option to counter this is through investing in technology and materials that are able to withstand the effects of weather. This, however, can become quite costly. States can also regulate private insurers through their own legislation, but like what we saw with State Farm and California, insurers can still choose to pull out.

So how are insurers currently addressing severe weather?

Some are taking an educational approach, such as Lemonade Insurance. A common issue that consumers struggle with is not knowing exactly what their insurance covers. For example, many consumers are unaware that the standard renter’s insurance policy does not cover flooding. Lemonade speaks to this through the creative below by presenting information in the form of a test question. It’s also notable that Lemonade doesn’t give the answer away in this creative. If the viewer wants to know the answer they have to engage with the ad, which could get the ball rolling on purchasing one of Lemonade’s policies.

Other insurers have focused on communicating the preventative methods consumers can take to reduce the damage done by severe weather. For example, Travelers Insurance used email to urge customers to prepare for hurricanes before a hurricane warning has been issued.

Another area of focus for insurers is the communication style they use in response to severe weather events that have already occurred. For example, Progressive sent out mass emails to customers within different areas that were affected by severe weather as a way to gently remind them that Progressive is there to support them.

What can insurers do better?

Brands that aren’t sensitive to the emotional distress consumers experience during a disaster could risk losing them as customers. With the power of digitalization and social media, one bad experience could go viral and permanently tarnish a brand’s reputation. Additionally, as natural disasters worsen and more are affected, consumers may become increasingly invested in understanding global warming and its causes. It will be important for brands to be transparent about what they’re doing to help, and what consumers can do to help themselves.

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