This year’s El Niño weather phenomenon is the strongest since the record-setting event of 1997-98, and its peak months are still to come.

While its impact on insurers and reinsurers is largely unpredictable, indicators are emerging showing billions of dollars of economic losses that can be attributed to the weather event.

That could spell trouble for reinsurers who have taken on added catastrophe risk as a strategy to deal with the sector’s prolonged soft market conditions.

Standard & Poor’s Ratings Service yesterday struck a cautionary note towards such moves as it issued a report urging a continued disciplined approach to catastrophe risk.

Companies with exposure to crop insurance can expect claims as global drought conditions worsen due to El Niño. A report from Aon Benfield is warning that economic losses from global drought are now expected to top $8 billion.

“As El Niño continues to intensify in the coming months, it is expected that global drought losses will surpass the current forecast of $8 billion in economic damage,” said Aon Benfield in its Global Catastrophe Recap report.

Drought conditions have worsened in several Caribbean and Central American countries, while the ongoing drought in the western US is now expected to cause economic losses of more than $3 billion, with most of the losses coming from agricultural damage in California.

On the flip side, a strong El Niño tends to curb hurricane activity in the Atlantic, losses from which are typically the biggest driver of insurance and reinsurance rates. Therefore, a quiet Atlantic hurricane season is likely to mean further pressure on renewal rates in the new year.

Reinsurers tempted to increase exposure to catastrophe risk as a soft market strategy have been urged to be cautious by Standard & Poor’s, which yesterday issued its report ‘Discipline is necessary as reinsurers adjust their exposure to catastrophe risk’.

It said: “Two years of low claims have contributed to the current record high levels of capital in the industry and thus to the recent downward trend in catastrophe risk pricing.

“Insured catastrophe losses in 2014 have been estimated at $35 billion, around half the ten-year average of $64 billion for the global reinsurance industry.”

The agency noted that there has been a divergence in strategies used by reinsurers in reaction to the softening markets, with a few opting to take on more exposure.

It said: “In our view, an increased focus on catastrophe risk weakens a reinsurer’s risk position by increasing volatility in earnings and on the balance sheet. We consider underwriting profitability in the sector likely to become more vulnerable to natural catastrophes; therefore, we anticipate that operating performance could deteriorate at reinsurers that are more exposed.”

James Lynch, chief actuary at the New York-based Insurance Information Institute, does not believe El Niño plays a major part in portfolio risk considerations.

He told The Royal Gazette: “Insurers are well aware of the El Niño phenomenon, particularly in the reinsurance sector. It certainly doesn’t play a major role in assembling a portfolio of risks, which is generally pegged to the 250-year loss event — spanning dozens of El Niño’s ebbs and flows.

“It might play a subjective role in pricing, but I haven’t heard of that happening either. It’s important to remember that El Niño affects the probability of what are already infrequent events.”

He added: “I’d hate to be the underwriter who bet El Niño would protect Miami in 1992, the year Andrew hit.”

The full impact of this year’s El Niño event, in terms of catastrophe losses, has yet to be seen, although indications suggest it may be one of the strongest El Niños on record and could stretch into 2016.

The El Niño phenomenon is a warming phase in a cycle of ocean water in central and east-central areas of the Pacific Ocean, known as the El Niño-Southern Oscillation.

El Niño events occur when atmospheric and ocean circulation patterns that normally reinforce one another, collapse. This happens roughly every three to seven years, and may herald an increase in insured losses in the Asia Pacific region as a result of an eastward shift in the landfall locations of tropical cyclones.

Last month, two typhoons in the eastern Pacific killed 111 people and caused more than $4 billion in economic losses. Super Typhoon Soudelor, packing maximum wind speeds of 180 miles per hour, struck Taiwan and China on August 8. The weaker Typhoon Goni hit a number of countries, including Japan, China and Philippines between August 25 and 28.

A large region of dry air in the North Atlantic has contributed to unfavourable conditions for the development of hurricanes. However, Tropical Storm Erika claimed 36 lives and caused economic losses of $100 million when it reached the Caribbean and tracked through Dominica and a number of neighbouring islands at the end of August.

Climate models are indicating the sea surface temperature in the east-central Pacific Ocean will be more than two degrees Celsius (3.6F) warmer than normal this year — leading experts to forecast that the present El Niño may be one of the strongest ever.

David Carlson, director of the Switzerland-based World Climate Research Programme, on Tuesday said it was still unclear how global warming might be affecting the frequency and strength of El Niño events. Since 1950 the strongest El Niño events have been in 1972, 1982 and 1997.

Australia’s Bureau of Meteorology this week said most of the international climate models it has surveyed indicate further sea surface warming in the Pacific, and that the current El Niño event might stretch into 2016.