Aon Scientist Analyzes Insurance Coverage for Volcanic Eruptions

Volcanic eruptions are right up there with hurricanes and earthquakes on the list of nature’s most formidable catastrophes. The April eruption of the Eyjafjallajokull volcano in Iceland was but one manifestation – gritty clouds of ash – of the dangers lurking under the earth’s crust. See also IJ web site -intent.”
https://www.insurancejournal.com/news/international/2010/06/04/110442.htm.

In a timely move Aon Benfield launched its “Research Month” with an analysis of the dangers posed by volcanic activity. The research also focused on the role played by the insurance industry in addressing the consequences of an eruption. The full report may be down loaded at: http://www.aon.com/attachments/reinsurance/201006_ab_volcanic_eruptions_report.pdf

As a keynote speaker at the Cities on Volcanoes 6 conference in Tenerife in June 2010 Aon Benfield Scientist Professor Russell Blong examined insurance policy wordings in relation to volcanic eruption scenarios. He stressed the importance to the global re/insurance industry of thinking “carefully about the cover that policies may actually provide,” and raised “questions about ambiguous wordings and how these need to reflect underwriting intent.”

Aon’s bulletin notes that “volcanic eruptions can affect large, heavily insured urban areas such as Seattle, Mexico City and Auckland. On the other hand, insurers particularly need to take heed of exposures in South East Asia as they seek to increase insurance penetration in a region where eruptions have the potential to affect major cities such as Jakarta and Manila.

“A standard clause may refer to ‘loss occurrence’ as meaning all individual losses arising out of and directly occasioned by one catastrophe. However, the duration and extent of any ‘loss occurrence’ shall be limited to ’72 consecutive hours as regards earthquake, seaquake, tidal wave and/or volcanic eruption’.”

This type of wording is pretty much the same around the world. “Volcanic eruption is grouped together with earthquake and tsunami, even with ‘seaquake’. But some contracts refer to ‘volcanic activity’, ‘volcanic eruption’ (seismic events) or even ‘losses caused by volcano’. In plain English, these different wordings do not mean the same – though that may or may not have been the intent,” Prof. Blong explained.

As examples of the different ways a volcano can cause damages, the report cited:
– a 1953 incident in New Zealand, where water in the volcano Ruapehu’s crater lake breached the crater wall, causing a mudflow, which in turn destroyed a railroad bridge. An overnight express train crashed, causing the deaths of 151 people.
— Another New Zealand incident in 2005, occurred when damages were caused by “hydrothermal activity – steam, gas and hot water –” at several locations within the city of Rotorua.
— Since 1997 houses, many in good condition, in Plymouth on the Caribbean Island of Montserrat have stood vacant, after the town was declared an “exclusion zone” following a volcanic eruption. “For the owners, the houses are ‘total constructive losses’. How should insurance policy wordings address similar situations in the future?”

Prof. Blong also pointed out that eruptions can “last from a few minutes to more than a year with a median value of around 10 hours.” Policy wordings in most insurance policies relating to volcanic activity specify durations of 72, 168 or (less commonly) 672 hours,” which may not be adequate in many cases.

There are also questions of coverage for the costs of cleaning up after an eruption, especially where volcanic ash has spread over wide areas. As an example, the report notes that a recurrence of the 1707 eruption of Japan’s Mt. Fuji “would spread ash across the Tokyo and Yokohama urban areas. The cost of cleanup and removal of ash from the urban areas is estimated to cost more than $10 billion. Not all of this cost would fall to insurers but have re/insurers considered the potential costs?”

Prof. Blong added: “The re/insurance community needs to further understand the physical nature and consequences of volcanic eruptions and how these could impact their balance sheets. Volcanologists and re/insurers working together can help shape underwriting strategies and draft less ambiguous wordings.”

Source: Aon Benfield