Assessing Volcanic Hazards and Financial Exposure: A Closer Look at Insurance Industry Preparedness

James Hallam Dalziel , Mike Cassidy, Lara Mani

Within the insurance and reinsurance sectors, volcanoes and their secondary impacts are often an overlooked risk due to the long return periods associated with large explosive eruptions, and relatively low economic and insured losses from eruption events compared to other natural hazards such as large magnitude earthquakes. However, with continued population growth, globalisation and climate change increasing exposure to volcanoes, and more sophisticated monitoring and modelling methods revealing the true extent of both primary volcanic hazards and secondary effects, this is a peril that should be more thoroughly considered. This study reviews exposure to active Holocene volcanoes, compares economic and insured losses of significant eruptions, and explores how analogues of historic events could affect the modern world. We show that the past 40 years have mostly seen eruptions of Volcanic Explosivity Index (VEI) 3–4; significant but not “super-catastrophes.” Should a larger VEI 6+ event occur near a densely populated area or in a country with high insurance penetration, losses could be far higher. Countries with the highest exposed populations to volcanoes include Indonesia, the Philippines and Guatemala. However, this differs from countries at greatest risk of insurable losses, such as China, Japan and the US, and lower insurance penetration in more exposed countries identifies a significant protection gap. Eruptions in smaller nations show particular financial vulnerability, with recent eruptions in Tonga and La Palma leading to large losses in proportion to their GDP; as much as 1/3 of their economy (30-37%). The economic losses of accumulated volcanic activity have totalled $152.6 billion over 20 years (an average of $7.6 billion a year). Recent estimates that a large, long return period, global climate-affecting eruption might lead to losses in the multi-trillions, and would impact pre-existing reinsurance markets in a similar manner to tropical cyclones, highlights the need for greater attention, preparedness and resilience measures. With this in mind, we discuss current research and industry initiatives to collate volcanic data, to aid disaster risk reduction strategies. It is hoped that by working with such organisations, and helping facilitate global standardisation of data and risk communication, the insurance industry can be better prepared for future volcanic eruption scenarios.