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Swiss Re’s pioneering volcano model highlights multi-billion dollar exposure

23rd March 2017 - Author: Luke Gallin

A new, world first international volcano risk model has been launched by reinsurance giant Swiss Re, and reveals that some of the planet’s largest cities have an economic exposure of up to $30 billion, underlining the need for effective insurance solutions.

Volcanic eruptionMore than 1 billion people around the world live within in 150km of an active volcano, ranging from more developed countries like Japan and Italy to emerging economies of the world, such as Nicaragua and Ecuador, says the Swiss Re model.

The new, first of its kind model assesses risk in the case of more than 500 active volcanoes around the world, and provides insurers and reinsurers with the ability to quantify volcanic risks and the subsequent expected losses from volcanic eruptions.

The ability to better assess and understand volcanic risk across the world enables re/insurers to develop more comprehensive, effective, and hopefully affordable protection for clients. Limitations with modelling volcanic risk has contributed to a global protection gap, where countries have extremely high exposure to a volcanic eruption and dangerously low insurance penetration levels.

The only country in the world where volcano insurance is compulsory is Iceland, and as a result the city of Reykjavik ranks last on the top 15 cities most at risk of losing 0.5%+ of their country’s GDP following a volcanic ash fall.

The three cities most at risk are Manague, Nicaragua (1), San Jose, Costa Rica (2), and San Salvador in Ecuador (3), according to the Swiss Re model. Emerging countries often rely heavily on their capital cities for economic stability and well-being, so while the potential economic loss might be far lower than more developed parts of the world, such as parts of Japan, low insurance penetration combined with lower incomes and potentially lower hazard awareness, means it’s often much harder to recover post-event.

“As global urbanisation gathers pace, the protection gap for volcanic hazards widens. But economic disruption and large-scale economic losses for people and businesses locally are only one part of the picture. For example, in the case of any large scale eruption, supply chains would be affected all around the world, causing both economic and insured losses,” said Jayne Plunkett, Chief Executive Officer (CEO), Reinsurance Asia, Swiss Re.

A large population, higher asset values when compared with emerging regions and the location of volcanoes in Japan, makes the country most at risk in terms of potential economic losses from a volcanic eruption, of up to $30 billion, says the model.

Martin Bertogg, Head Catastrophic Perils at Swiss Re, commented; “The new model allows us to calculate premiums for this important risk for individuals, businesses and countries. It’s now up to us in the insurance industry to use this new opportunity, together with all partners, to design trustworthy and affordable coverage to help make the world more resilient when disaster strikes.

“This is a cornerstone of making this risk insurable. It’s now up to us in the insurance industry to use this new opportunity together with our partners to design reliable and affordable coverage, making our world more resilient if disaster strikes.”

For insurers and reinsurers the new model provides an opportunity to develop solutions that protect the world’s most vulnerable against volcanic eruptions. The ability to better assess and price volcanic risk should result in more and more people around the world being protected against the exposure. Ultimately narrowing the global protection gap and increasing global resilience against natural disasters, while providing re/insurers with a new, diversifying business line.

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