In recent years, volcanic eruptions have severely disrupted air travel, causing widespread havoc on economies, and losses for insurers. Emma Phillips of Risk Frontiers explores the direct and indirect impacts of volcanoes.
The insurance industry strives to estimate the cost and understand the impact of future natural hazard events. Insurers and reinsurers have been the key risk takers and, ultimately, the shock absorbers in today’s modern world (Haueter, 2013). Through research in areas such as engineering, economics, earth sciences and geography, we have come to better understand the direct impact natural hazard events have on the built environment.
However, it is becoming increasingly clear that direct damage only represents a portion of the total cost of natural hazard events. Indirect disruptions, both social and economic, contribute significant losses and in some cases these can be greater than the direct damage itself.
Supply chain disruption and accumulation of risk
In terms of business interruption the situation is further aggravated when multiple branches of industry are supplied by a small number of highly specialised manufacturers. When manufacturers are concentrated within a single geographical area, insurers face an accumulated exposure to a single loss event (Asia Insurance Review, 2014). The Thailand floods and Tohoku earthquake and tsunami in 2011 highlighted the enormous accumulation potential of supply chain disruptions and showed insurers and reinsurers how exposed they were to contingent business interruption (Asia Insurance Review, 2014, Greeley, 2012). The fact that many companies now see supply chain interruptions as one of their biggest risks shows just how deeply the global economy was shaken by the events of 2011 (Asia Insurance Review, 2014).
Impact on insurers
Can the insurance industry keep up with an increasingly interconnected and volatile world, where the cost and reach of disruptions will only increase? There is still debate within the industry over the future of contingent business interruption coverage and in some cases insurers have not responded to this challenge at all (Galey et al., 2002, Miller Insurance, 2012). On the other hand some sectors are making amendments and calling out for more transparency from their customers (Ladbury, 2014). In order to truly understand the price of indirect disruption, the industry needs to thoroughly examine each company’s suppliers and the location of these suppliers, in order to identify vulnerabilities in their production and distribution process (Asia Insurance Review, 2014). Both direct suppliers and their subcontractors should be included in risk assessments (Asia Insurance Review, 2014). Secondly, underwriters should also identify as many threat scenarios as possible involving different hazard events and possible exposure accumulations (Galey et al., 2002). Just one example of a catastrophic natural hazard scenario could be the case of a large explosive volcanic eruption.
Historic volcanic eruptions
The largest volcanic eruptions on earth, greater than 450 km3 of dense eruptive magma (or 1000 km3 of fragmented volcanic ash deposits) (Self, 2006), have been described as the ultimate geologic hazard due to the immediate and devastating impacts from eruption products and potential longer-term climatic effects arising from loading the stratosphere with sulphur-rich gases (Miliier and Wark 2008; Self, 2006; Oppenheimer, 2002). However, the awareness of risks from volcanic eruptions remains low due to the infrequent nature of significant events in modern history. Consequently, commercial organisations are rarely prepared for the indirect impacts of a significant eruption, either locally or abroad.
Volcanic eruptions are unique in that hazards may be very widespread and can persist over many weeks or months. Multiple volcanic hazards can occur simultaneously or consecutively, causing impacts over various distances and time scales (Wilson et al., 2014). Lateral forces, vertical loads, burial and exposure to high temperatures from lava flows, lahars, pyroclastic density currents and tephra falls can immediately damage buildings and infrastructure (Jenkins et al., 2014). Volcanic ash in particular is heavy, highly abrasive, corrosive and conductive and can spread far and wide; only millimetres are needed to disrupt essential services and critical infrastructure, such as electricity, water supply, waste systems, communications, roads and air transport (Wilson et al., 2014). Ejected into the atmosphere and carried by the wind, volcanic ash can potentially circulate the globe, causing international travel disruption.
Puyehue-Cordón Caulle (VEI 5 0.29km3 DRE, or 0.7km3 deposit volume)
The Puyehue-Cordón Caulle eruption, Chile, sent ash right around the Southern hemisphere, forcing hundreds of international and domestic flights to be cancelled. The eruption began on 4 June 2011, and by the 18 June the ash cloud had completed its first circle of the globe. On the 11 June the ash cloud had reached the southern tip of New Zealand causing numerous cancellations of flights between Adelaide, Melbourne, Perth, Tasmania and New Zealand up until 22 June, and triggering substantial losses on travel insurance policies.
Eyjafjallajökull (VEI 4 0.04km3 or 0.1km3)
The 2010 eruption at Eyjafjallajökull volcano, Iceland, also highlighted the potential economic impacts from volcanic eruptions and exposed our reliance on air transport and its vulnerability to disruption from volcanic hazards. The April 2010 eruption caused extensive air travel disruption with the closure of large areas of European airspace for seven days. This disrupted the travel arrangements of hundreds of thousands of people; caused stock shortages and the spoilage of goods; affected sporting, political and cultural activities in Europe and across the world; and resulted in an estimated total loss of approximately US$1.7 billion for the airline industry alone (IATA, 2010; Oxford-Economics, 2010). Once again, there were substantial losses for insurers providing travel insurance.
Although disruptive, these events were relatively small compared to cataclysmic eruptions that have occurred around the world in the past. One of the largest eruptions on earth (involving 2800 km3 of new magmatic material) occurred about 74,000 years ago at Toba, Indonesia. This eruption produced major pyroclastic flows that covered an area of 20,000 km2; in some locations leaving deposits up to 200 metres thick (Self and Blake, 2008; Oppenheimer, 2002). Ash covered an area in excess of 20 million km2, or 4% of the surface area of Earth, reaching over 3000 km from source to northern Indian (Self and Blake, 2008). A repeat of an event like this would be truly devastating.
Figure: The volume and location of mentioned eruptions plotted on the world map with the locations of the world’s volcanoes. Eruption volumes sourced from the Volcano Global Risk Identification and Analysis Project (VOGRIPA) database (http://www.bgs.ac.uk/vogripa/) and volcano locations sourced from Smithsonian Institution National Museum of Nation History Global Volcanism Program database (http://volcano.si.edu/).
Slightly smaller eruptions still pose risk
Eruptions of this magnitude are, however, shown to be very rare. A survey conducted by Mason et al (2004) estimated the average frequency of these events to be 1 every 100,000-200,000 years. Slightly smaller eruptions of volumes greater than 40 km3 of erupted magma (or 100 km3 volcanic ash deposit) are much more frequent and still pose a considerable hazard to society (Self, 2006). In the Asia-Pacific region, eruptions of this size have an average recurrence interval of about 440 years (Mead and Magill, 2014). Compared to Toba like eruptions, eruption rates of this smaller magnitude can be sustained for longer and ash fall makes up a higher proportion of eruptive volume (Mason et al., 2004; Self, 2006), for that reason they should receive particular attention.
In 1815, the Tambora volcano exploded with a dramatic eruption after more than three years of mild eruptive activity. This large explosion could easily have been taken as the conclusion of the eruptive phase. However, after a five day lull in activity, came the largest explosive eruption in recorded history of about 30 km3 (Siebert et al., 2010; Self et al., 2004). The eruption sent ash 1,300 km from source, covering those within 500 km of the volcano in darkness for three days and impacting climate and food production in regions as far as China, Europe and North America. This in turn caused widespread sickness and hunger; an estimated 11,000 fatalities resulted from direct volcanic impacts and a further approximately 50,000 fatalities were due to post-eruption famine and epidemic diseases (Siebert et al., 2010). Tambora, which had an ejected volume less than 5% of the Toba eruption, still affected global climate and was the main cause for the 1816 ‘year without a summer’, resulting in tens of thousands of deaths (Miller and Wark, 2008).
What would be the impact and cost of an event such as Tambora in modern society today? To what extent would transportation systems, supply chains, and utility networks be disrupted and would affected business losses be insured? A future large, explosive and potentially prolonged volcanic eruption could lead to a global disaster and it is an event that will not elude us forever. If large natural hazard disaster scenarios are ignored, the next event will be a rather rude awakening. Potentially one the insurance industry would struggle to recover from.
“Of concern is a situation where a volcano that is presently unrecognized as a potential large-eruption site, or that is evolving towards its ﬁrst super-eruption, or that is not monitored, becomes unrestful” (Self, 2006).
ASIA INSURANCE REVIEW. 2014. Engaging corporate risk managers: contingent business interruption – a clear view? [Online]. Ins Communications Pte Ltd. Available: http://www.asiainsurancereview.com/Magazine/ReadMagazineArticle?aid=34925 [Accessed 02/05/2014].
GALEY, G., CHRISTOFFEL, A., GMUR, R., LUCK, P., NIGON, P., SORMANI, E., TRECENO, O. & URECH, E. 2002. Contingent business interruption and other special covers, Zurich, Swiss Reinsurance Company.
GREELEY, B. 2012. Sandy will reopen a ‘Black Box’ of insurance claims [Online]. New York: Bloomberg L.P. Available: http://www.businessweek.com/articles/2012-11-02/sandy-will-re-open-a-black-box-of-insurance-claims [Accessed 02/05/2014 2014].
HAUETER, N. V. 2013. A history of insurance, Swiss Re.
IATA 2010. The impact of Eyjafjallajokull’s volcanic ash plume. IATA Economic Briefing.
JENKINS, S. F., SPENCE, R. J. S., FONSECA, J. F. B. D., SOLIDUM, R. U. & WILSON, T. M. 2014. Volcanic risk assessment: Quantifying physical vulnerability in the built environment. Journal of Volcanology and Geothermal Research, 276, 105-120.
LADBURY, A. 2014. Muich Re calls for more transparency on CBI risks [Online]. Rubicon Media Ltd. Available: http://www.commercialriskeurope.com/cre/2957/56/Munich-Re-calls-for-more-transparency-on-CBI-risks/ [Accessed 02/05/2014].
MASON, B. G., PYLE, D. M. & OPPENHEIMER, C. 2004. The size and frequency of the largest explosive eruptions on Earth. Bulletin of Volcanology, 66, 735-748.
MEAD, S. & MAGILL, C. 2014. Determining change points in data completeness for the Holocene eruption record. Bulletin of Volcanology, 76, 874.
MILLER INSURANCE. 2012. Reinsurance insights: Protecting the supply chain [Online]. Miller Insurance Services LLP. Available: http://www.miller-insurance.com/~/media/Files/Publications/Reinsurance%20insights/Protecting%20the%20supply%20chain.ashx [Accessed 02/05/2014].
MILLER, C. F., WARK, D. A. 2008. Supervolcanoes and their explosive supereruptions. Elements, 4, 11-16.
OPPEMHEIMER, C. 2002. Limited global change due to the largest known Quaternary eruption, Toba ~74kyr BP? Quaternary Science Reviews, 21, 1593-1609.
OXFORD-ECONOMICS 2010. The Economic Impacts of Air Travel Restrictions Due to Volcanic Ash. A report of Airbus.
SELF, S., GERTISSER, R., THORDARSON, T., RAMPINO, M. R. & WOLFF, J. A. 2004. Magma volume, volatile emissions, and stratospheric aerosols from the 1815 eruption of Tambora. Geophysical Research Letters, 13, L20608.
SELF, S. 2006. The effects and consequences of very large explosive volcanic eruptions. Philosophical Transactions of the Royal Society A, 364, 2073-2097.
SELF, S. & BLAKE, S. 2008. Consequences of explosive supereruptions. Elements, 4, 41-46.
SIEBERT, L., SIMKIN, T., KIMBERLY, P. 2010. Volcanoes of the World, 3rd edition. University of California Press, Berkeley.
WILSON, G., WILSON, T. M., DELIGNE, N. I. & COLE, J. W. 2014. Volcanic hazard impacts to critical infrastructure: A review. Journal of Volcanology and Geothermal Research, 286, 148-182.
CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.