Welcome to the Volcano Catbond Series
Are you exposed to the volcanic threat?
Mitiga Solutions, a Barcelona-based insurtech company, is launching a series of articles aimed at helping people better understand volcanic hazards and how to mitigate them. Despite the awe-inspiring beauty of volcanoes, they pose a serious risk to the more than 1 billion people living within 150 km of an active volcano, and in some cases, even threaten the global society. With volcanic eruptions causing billions of dollars in economic losses, it is important to take action to understand and prepare for potential risks. So, should you be worried about volcanoes? Let’s see!
As a volcanologist, I always wonder why wouldn’t you be fascinated by this beautiful, powerful, destructive force of nature? The sight of glowing lava slowly and unstoppably making its way down the flanks, of unbelievable explosions sending ash high enough into the atmosphere that it threatens airplanes, of hot avalanches burning their path through anything in their way, will never seize to amaze and humble me.
Volcanism is an impressive way of mother nature to demonstrate that humans are a mere parasite on this planet. It is geology, that tends to act on timescales of thousands to millions and billions of years, accelerated to supersonic speeds. It is a threat, but also a blessing. Fertile volcanic soils have attracted human settlements since long ago, and the beauty of volcanoes is now an important and lucrative aspect of local tourism.
And this is why a lot of people should care. Did you ever vacation on the Canary Islands, on Hawaii, in Italy, in Iceland, in Bali, anywhere around the Pacific, or maybe on some other suspiciously cone-shaped island? Do you have any assets in those regions – a house, a farm, a factory? Have you ever ridden a plane? Then, congratulations! You won exposure to volcanic eruptions. *
You personally may only be at risk that one week a year you spend in Tenerife. But for the more than 1 billion people worldwide living within 150 km of an active volcano, volcanic risk is a daily reality (1). Volcanic eruptions are a potential cause for major losses around the globe, with an estimated total of 12B US$ of damage between 1980 and 2019 (2). Significant eruptions since 1970 have caused economic losses between 200M and 5B US$ (3,4) per event. If you were born before the 2000’s, you surely remember the record- and tongue-breaking volcano on that ranking: Eyjafjallajökull in Iceland. Its 2010 eruption was not even particularly big, but the ash was distributed so widely that it grounded most planes in Europe for weeks.
So, what can we do about it? Here’s a list of potential actions.
- Stop the volcano from erupting: Unfortunately, we can’t. No matter what some people tell you about releasing pressure from the magma chamber by drilling into it... No, we can’t.
- Place the statue of a saint in front of an advancing lava flow: While this did have success on occasion, I personally wouldn’t count on it.
- Put some form of giant hat over the vent, in order to....
Okay, okay… Here’s the real list.
- Before: This is the time to get to know your volcano as best as you can. Studying the volcano’s history, hazard and risk assessments support land planning and the design of emergency plans. Additionally, volcano observatories around the world are keeping a close eye on the restless mountains under their watch, using a range of geophysical and geochemical techniques to provide warning before an impending eruption.
- During: Sensible evacuation is key in an eruption crisis, as is the continued monitoring and forecasting of the ongoing situation to adjust the plan if needed. Volcanic eruptions can go on for a long time – from hours to decades – and change course several times.
- After: Finally, it is time to rebuild.
Money makes the world go round and all these steps require funding. The need is particularly urgent and significant during and immediately after an eruption, when infrastructure, farmland and homes have been destroyed. This particularly affects developing countries, where risk mitigation and recovery after a crisis usually requires humanitarian aid.
While many natural disasters can be covered by insurance, damages due to volcanic eruptions usually aren’t. The individual protection gap for recent eruptions was between 50 and 100% (3,4), which is mainly attributed to limitations of traditional insurance. Traditional insurance cover can be expensive for volcanic eruptions, and the processing of claims is often complicated and long (5). While eruptions can cause immense losses, they are still considered a minor peril by the insurance sector as significant events occur less frequently than other natural disasters. Therefore, insurance companies usually lack the expertise to underwrite such cases and eruptions remain a poorly or unmodelled risk in the (re)insurance sector.
The protection gap for volcanic eruptions is significant, due to limitations of traditional insurance. Alternative risk transfer offers an effective solution.
In short, a catastrophe (cat) bond is a form of parametric insurance, where the risk of a disaster is transferred from the sponsor of the bond to the capital market. Often applied in insurance solutions for natural hazards, a parametric structure allows fast and simple release of a pre-defined pay-out to the insured upon an event with an intensity surpassing a pre-agreed triggering value. For example, a parametric insurance pay-out covering storm-induced damage could be triggered once a storm surpasses a certain wind speed. In a catbond, private investors are the ones who provide this financial backing for disaster relief, in return for high yields.
In 2021, the world’s first volcano catbond was released to the market by Replexus and Howden Capital Market through Replexus’ Dunant Re reinsurance structure. Mitiga provided the risk modelling for the bond, which covers eruption risk from 10 volcanoes around the world. The bond trigger is a combination of eruption column height and dominating wind speeds at the time of eruption, as these are the main factors determining the regions with ash fallout and thus induced damages by an explosive eruption. Pay-out can be released within hours to the sponsor of the bond, the Denish Red Cross (DRC).
Mitiga also provides state-of-the-art short-term forecasting of the fallout. The model predicts the spatial and temporal developments of tephra fallout on the ground and concentrations of airborne ash, based on the current wind field and eruption source parameters as they become available. This information then supports the DRC in allocating funds and directing humanitarian actions during and after the eruption crisis.
In a current project funded by the prestigious Tecniospring programme, part of the Marie Curie Actions of the European Union, Mitiga is working on extending the work performed for the DRC catbond to new volcanic regions such as the Caribbean. Furthermore, other volcanic hazards than ash fallout are to be added to the impact modelling involved in designing the bond structure.
Do you want to know more? Stay tuned!
Follow this series to get more detailed information in future articles regarding volcanic hazards, methods of alternative risk transfer, modelling capabilities, ongoing developments, and more!
And if you worry about your exposure to volcanic hazards, we would be delighted to support you with our volcano product line. Contact us anytime at info@mitigasolutions.com!
*And if we take supereruptions into consideration, then the whole world is at risk anyway – but let’s leave that topic for a future article!
Your friendly neighbourhood volcanologist.
Dr. Karen Strehlow
Volcanologist and Catastrophe Modeller at Mitiga
References:
- Smolka, A., and Käser, M. (2015) Chapter 12 - Volcanic Risks and Insurance. In Shroder, J.F., and Papale, P. (Eds.), Volcanic Hazards, Risks and Disasters (pp. 301-314), in Hazards and Disasters Series, Elsevier. DOI: 10.1016/B978-0-12-396453-3.00012-5
- Prata, F., and Rose, B. (2015) Chapter 52: Volcanic ash hazards to aviation. In Sigurdsson, H. (Ed.), The Encyclopedia of Volcanoes (Second Edition) (pp. 911-934), Academic Press. DOI: 10.1016/B978-0-12-385938-9.00052-3
- Blong, R., Tillyard, C., and Attard, G. (2017) Insurance and a Volcanic Crisis – A Tale of One (Big) Eruption, Two Insurers, and Innumerable Insureds. In: Fearnley, C.J. et al. (eds) Observing the Volcano World. Advances in Volcanology, Springer, Cham. https://doi.org/10.1007/11157_2016_42
