Volcanic eruption:
The role of
insurance
Supporting resilient infrastructure against volcanic risks
The initial impact of a volcanic eruption on communities in its immediate vicinity can be devastating with damages to vital infrastructure and to businesses, homes, vehicles and sadly, loss of life. And the fallout - both physical and financial - would likely spread, impacting the economy on a global scale. In such an event, insurance can be a financial lifeline. We work alongside private and public sector partners to protect against risks that could arise in the aftermath of a volcanic eruption, and our products and expertise help people and businesses recover by providing economic protection and enabling the mobilisation of emergency response resources.
Key product considerations
Property insurance
Property within the ‘blast zone’ is vulnerable to destruction, and abandoned homes and businesses can fall into disrepair or become the target of criminals or vandalism. In some specific circumstances, large earthquakes can cause a volcano to erupt, if the volcano is “ready” to erupt. Property insurance can support the recovery of physical damage and business interruption losses from these natural hazards, and we can help with risk management to reduce future vulnerability.
Our industry is committed to furthering our understanding of volcano risk so that we can better support our customers. Research6 has been conducted to understand the impact volcanic ash fall has on various kinds of building stock and in recent years global and country-specific volcano catastrophe models have been developed and are used to understand potential exposure to an eruption. With this enhanced insight, parametric solutions are being launched that auto-authorise claims in explosive eruptions, enabling impacted countries to get back on their feet faster.
Emergency response
Lloyd’s Disaster Risk Facility has supported a tailored risk transfer mechanism for the International Federation of Red Cross and Red Crescent Societies (IFRC)’s Disaster Response Emergency Fund (DREF) to ensure that funding is available to support life-saving assistance in vulnerable communities experiencing all kinds of disasters. In 2021 the DREF supported the large-scale emergency response following the Mount Nyiragongo volcanic eruption in Rwanda and the Democratic Republic of the Congo.
In 2021 the Danish Red Cross launched a Volcano Cat Bond, the first of its kind purely focused on volcano risk, in partnership between Dunant Re IC Limited and Mitigia Solutions. This parametric product is triggered by a combination of the height of the volcanic ash plume and whether prevailing winds would put a populated area at risk and, if triggered, releases funds for emergency disaster relief. The policy covers 10 volcanoes around the world all with at least 700,000 people living within a 60-mile radius, including Decade volcano Mount Merapi and Mount Ruang in Indonesia which have both erupted in 2024, and Mount Ruang which erupted in 20247.
Aviation insurance
Volcanic ash clouds have the potential to create significant travel disruption. During the 2010 eruption of Eyjafjallajökull, UK and parts of European airspace were contaminated by ash resulting in the cancellation of over 100,000 flights, at an estimated cost to the aviation industry of up to €2.5bn. Aviation insurance provides protection across the sector (e.g., airline operators, service providers, airports) and can include cover for loss of income following a catastrophic event such as a volcanic eruption.
Travel insurance
As well as the cost to airlines, disruption caused by volcanic ash cloud financially impacts travellers too. Travel insurance can help alleviate this; in 2010, an estimated £62m 8of travel insurance claims were paid to customers to compensate for disruption to journeys in Europe caused by the eruption of Eyjafjallajökull.
Agriculture insurance
Livestock mortality and crop failure is possible in large eruptions due to ash coverage, contaminated water supplies, or climatic temperature alterations. Livestock and crop insurance can compensate damage to or destruction of farmers’ stock, business continuity costs, and create access to credit facilities to support risk mitigation.
Casualty insurance
Claims relating to loss of life while at work or long-tail effects of the volcanic eruption, for example health problems due to ash exposure, can be mitigated through casualty insurance policies such as employers’ liability or workers compensation.
[6] 2017, Blong et Al, Estimating building vulnerability to volcanic ash fall for insurance and other purposes
[7] https://www.artemis.bm/deal-directory/dunant-re-ic-limited-series-2021-1/
[8] https://www.insurancetimes.co.uk/abi-ash-claims-to-cost-insurers-62m/1384247.article
Facing into a braver future
Risk – and insurance – matter the most in times of uncertainty. Our products and expertise help people and businesses manage uncertainty and make bolder decisions through those periods, so what we do today is more important than ever. We are committed to helping build preparedness and resilience around the potentially catastrophic systemic consequences of volcanic risk.
To help build greater resilience against this threat, insurers could:
Evolve volcanic risk cover: Current affirmative coverage for volcanic risk is limited and typically only added to property or motor policies by customers in a volcanic impact zone. This cover generally doesn’t cover the wider range of indirect impacts such as business interruption or supply chain disruption. Given the potential scale of economic losses highlighted by this scenario, the insurance industry alone could not provide full coverage for losses. Insurers should carefully consider any product design to ensure products offer value to customers while also effectively managing the potential exposures.
Collaborate to close the protection gap: Insurers can develop risk transfer mechanisms in public-private partnerships. The World Bank emergency relief fund reportedly released an initial $8m to support immediate recovery following the 2022 Hunga Tonga eruption. While it was a vital lifeline, the event caused over $90m worth of economic loss to the country through damage to building structures, infrastructure (including roads, power supply and the submarine cable, agriculture (crops and fisheries) before factoring in broader losses to the tourism and agricultural sectors[9]. This shows there is space for further collaboration and support from the insurance industry.
Lloyd’s is committed to closing the protection gap for the countries and communities around the world most impacted by disasters and in 2015 we launched the Disaster Risk Facility. The consortium will continue to engage with governments, municipalities, and multilateral organisations around the world to implement pre-arranged risk financing to reduce the cost, impact and recovery time following a disaster by ensuring financial support reaches those who need it most.
In 2023, as Chair of the Sustainable Markets Initiative’s Insurance Task Force, we also announced a partnership with the United Nations Capital Development Fund (UNCDF) to design innovative insurance products that will deliver financial resilience against climate shocks and promote public-private partnerships in Small Island Developing States (SIDS) and Least Developed Countries (LDCs), starting with the Pacific Islands.
[9] https://www.worldbank.org/en/news/press-release/2022/02/14/tonga-volcanic-eruption-and-tsunami-world-bank-disaster-assessment-report-estimates-damages-at-us-90m
The government perspective
For countries without a powerful and active volcano literally on their doorstep, their governments are likely focussed on other priorities and more tangible risks. However, even from afar, there are potential impacts on the global economy and people’s welfare from a high severity, extreme volcanic eruption event. Administrations worldwide should engage with the insurance and wider research communities to understand the impact of such an eruption and put contingencies in place.
Assess the threat
There’s no global standard or mechanism to deal with the fallout from a severe volcanic event, which makes it harder to take proactive steps to manage the risk. Governments can take steps to support the development of early warning technologies and explore frameworks that would help minimise economic and social damage in the event of an eruption.
In 2010, when Iceland’s Eyjafjallajökull erupted, the people on the ground were safe. Many Icelanders are well-versed in what to do in the event of an eruption and living as they do in an area of high volcanic activity overall, key infrastructure such as homes and transportation are placed well away from danger zones.
In 2024 the Indonesian government (taking lessons from the 1871 eruption which created a devastating 25m tsunami when part of the volcano collapsed into the sea) have evacuated over 11,000 people living on islands in the shadow of Mount Ruang.10
Diversify global supply chains
One of the most significant global impacts is likely to be to supply chains. We have seen from other events affecting supply chains, just how interconnected the global network is and how quickly it can be disrupted. Diversifying national supply chains across different logistical elements – road, rail, air, sea – particularly for essential goods such as food and pharmaceuticals, will minimise the greatest risks to economic and political stability.
[10] https://www.theguardian.com/world/2024/apr/20/indonesia-volcano-thousands-evacuated-amid-spreading-ash-and-tsunami-fears
Explore the impact of volcanic eruption
The economic impact
Additional insight from the scenario
Disclaimer
This report has been produced by Lloyd's Futureset and Cambridge Centre for Risk Studies for general information purposes only.
While care has been taken in gathering the data and preparing the report Lloyd's and Cambridge Centre for Risk Studies do not, severally or jointly, make any representations or warranties on behalf of themselves or others as to its accuracy or completeness and expressly exclude to the maximum extent permitted by law all those that might otherwise be implied.
Lloyd's and Cambridge Centre for Risk Studies accept no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.
Note that this report does not seek to replace or inform any of the mandatory scenarios which Lloyd’s publishes to support the Realistic Disaster Scenario exercises managing agents are required to undertake in respect of the syndicates managed by them.