This year, the world is facing a "super" El Niño, likely amplified by continuing climate change. This is happening at a time when businesses are also facing significant geopolitical and economic pressures that heighten volatility.
In this environment, organizations will need to challenge their modeling assumptions and build their own view on business vulnerabilities. While El Niño weather cycles have always driven weather volatility by shifting rainfall patterns, increasing drought risk in some regions and triggering intense flooding in others, there is evidence that El Niño and other climate or weather patterns are starting from a higher baseline in the wake of continuing climate change.
As sea surface temperatures rise, each El Niño now builds on an already warmer system, rendering what once seemed extreme or 'super' El Niño cycles as more likely. When the baseline for cycles that have long sat within standard catastrophe modeling changes, risk and insurance managers need to adapt to protect businesses.
Now is the time for organizations to build their own risk profile, one that may differ from the standard insurance view. Because while insurance models show how their risk may be priced, they may not show how disruption from increasingly common, extreme weather cycles will move through a business.
How does El Niño amplify physical climate?
If an organization operates across multiple regions, a strong or "super" El Niño can bring hotter, drier conditions in some locations and heavier rainfall in others. That can increase drought, heat and wildfire risk in parts of Australia, Southeast Asia and the Americas, while raising flood risk in parts of South America, East Africa and the southern US. It can also shift storm patterns, with fewer Atlantic hurricanes and more in the Pacific.
If a business is global, a weather shock in one part of the world can quickly become an operational or financial problem somewhere else in its value chain. A severe El Niño can disrupt supply chains, reduce water availability and damage infrastructure, with knock-on effects on production and energy reliability.
Past strong El Niño events, including 1997–98 and 2015–16, showed the same pattern of a single climate pattern triggering simultaneous stresses across multiple regions and business dependencies: drought in some regions, flooding in others and widespread disruption across food, water and livelihoods.
Risk, insurance and sustainability functions need to reassess how these extreme events, compounded by geopolitical volatility, could interact across an organization's value chain regularly.
Scenario stress testing can also help move away from looking at risks in silos. It provides a framework to quantify cascading impacts, understand how a risk profile could change and judge exactly how much disruption an organization can absorb.
Are standard catastrophe models keeping up?
Organizations may need to start treating insurance-recognized natural catastrophe model outputs as a starting point for deeper analysis rather than a full picture of your risk.
Most organizations still rely on catastrophe models to quantify risk, often by looking at perils such as flood or windstorm one at a time.
While these models remain useful, many depend on historical claims data and insurance-market assumptions that may no longer hold under today's climate conditions and compounding geopolitical pressures. They often reflect an insurance market view of risk: how the market sees exposure by peril, sector or line of business. In order to better manage the risks, a business instead needs to consider the specific vulnerabilities, dependencies and connections across its assets, operations and value chain.
If model inputs don't reflect the already climate-amplified conditions and specific vulnerabilities in an organization's operations and value chain to these compounding effects, they can understate potential losses.
How can you better risk manage recurring extreme climate events?
Start by defining risk tolerance in financial terms: how much loss can a business absorb and how often. Then stress-test those thresholds against scenarios that reflect current conditions and cascading effects, rather than historic averages.
Such inputs will give a better basis for benchmarking risk appetite and deciding what level of likelihood and financial impact a business is prepared to absorb on its balance sheet. If probabilities have shifted, an organization's current appetite and limits may no longer protect it.
Use analysis to decide what to retain, what to transfer and where higher limits or additional protection make financial sense. In a soft market, buying additional protection may cost less than absorbing the financial impact of a severe event.
Granular risk analysis to support better decisions
High-level models can't capture the specific vulnerabilities of a company's assets and operations. Carrying out more detailed assessments, supported by scenario stress testing, helps you build a business-specific view of risk.
By showing how exposure turns into loss across its operations and value chain, a business can build on the generalized market view to develop a clearer understanding of where disruption is most likely to occur, how it could spread and what the financial consequences could be.
Once an organization has a clearer view of its true risk profile, it can align financing with a future where extreme events happen more often. That may mean combining traditional insurance with captives, alternative risk transfer, targeted retention and adaptation measures, based on whether the business is best placed to retain risk and where transfer still adds value.
The stronger an organization's understanding of risk, the more confidently it can decide which losses belong on its balance sheet and which should be transferred, and where adaptation can reduce losses and improve the economics of the company's overall program.
