The Swiss Re Institute provided insights into the impact of the rapid shift from El Niño to La Niña on Latin America, highlighting the region’s long-term protection gaps and potential economic impacts.

This rare event, expected to occur this year, will test the resilience of Latin America’s infrastructure and agriculture.

The El Niño-Southern Oscillation (ENSO) is expected to transition from El Niño to El Niño-neutral conditions starting in May, with a greater than 80% probability of transitioning to El Niño by late summer and fall.

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Swiss Re points out that since 1950, only two years (1973 and 1998) have seen a three-month period of El Niño-neutral conditions between El Niño and La Niña. Latin America is particularly vulnerable to extreme weather conditions caused by El Niño, which can exacerbate already high gaps in agriculture and property protection.

The 2023-2024 El Niño event will bring major weather events, including heat waves in Brazil, forest fires in Chile, Argentina and Colombia, and floods in various countries. Heavy rains and warmer weather have also created ideal mosquito breeding conditions in Brazil and Peru, sending dengue cases to record levels and a national health emergency.

More recently, heavy rains caused by the El Niño phenomenon have caused floods, mudslides and dam failures in southern Brazil. On the other hand, Panama witnessed unprecedented droughts, which restricted the passage of ships through the Panama Canal and disrupted global trade.

Effects of ENSO on the economy

Climate fluctuations caused by the El Niño Southern Oscillation affect commodity exports, growth, and inflation, with rural communities bearing the brunt of agricultural disruptions. The recent La Niña event in 2021/2022 led to record droughts, shortfalls in crop productivity, and higher global food prices. In Brazil, agricultural insurance claims increased by 47% in 2022. Although crop resilience in Latin America has improved to 34% due to increased insurance penetration and government policies, it is still below the global average of 41%, with a gap In crop protection amounting to $6 billion. .

Weather-related insurance resilience indices in Brazil and Mexico are 10% and 18%, respectively, compared to advanced economies such as the United States (53%) and Switzerland (80%). Its emerging market peers such as South Africa (20%) and Turkey (30%) also outperform Latin America.

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The reinsurer noted that the economic impacts from ENSO are non-linear and vary by country. Losses typically include destruction of infrastructure, disruption of agriculture, and inflation due to rising food and energy prices. A successive El Niño event expected this year could prolong the region’s ongoing battle with inflation. An anomaly of +/- 1°C in sea surface temperatures can add 0.24 to 0.47 percentage points to annual headline inflation.

For insurers, while the direct impact of food and energy inflation may be small, second-order effects on core CPI through wage growth can increase claims costs in non-life lines of business.

Increased adoption of insurance products such as parametric solutions can help in rapid recovery from economic losses. However, building resilience also requires measures to adapt and mitigate losses.

For example, Swiss Re noted that the Panama Canal Authority is considering building a multi-purpose reservoir to handle dry seasons and normalize operations during droughts. In addition, the region faces a large gap in infrastructure spending, estimated at 1.3% of GDP in 2023, ranking second after Africa among emerging regions.

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