2010: The wide reach of cascading impacts from volcanoes

In recent history, volcanoes have represented relatively local-scale hazards to residents in the surrounding area. 

Ash, pyroclastic flows and lava are devastating to their immediate surroundings, as seen in Hawaii and Montserrat, but generally the scale of these hazards wasn’t sufficient to cause impacts that would materially change market thinking. On the rare occasions larger events did occur, they were in locations that had minimal impact on major supply chains (such as Pinatubo 1991, which caused ~US$100 million in damage to commercial airlines affected by ash but otherwise impacts were fairly localised).

That changed in 2010 with the eruption of Eyjafjallajökull in Iceland. The eruption itself was relatively modest by global volcanic standards. But the ash cloud and resulting closure of European airspace exposed something much more significant: in an interconnected world, a relatively local physical event could generate cascading disruption across global transport networks, supply chains and businesses far removed from the hazard itself.

For the insurance market, it was an important moment. The disruption highlighted that major business interruption losses can arise without obvious physical damage. Airports closed, flights were grounded, supply chains stalled and revenue was lost across multiple industries, despite little direct destruction to insured assets. Traditional Business Interruption (BI) and Contingent Business Interruption (CBI) structures, often designed around physical damage at a named supplier or location, were not always aligned with how disruption was actually propagating through the system.

Rethinking contingent business interruption

Following Eyjafjallajökull, CBI fed into more practical conversations between clients, brokers and carriers around what it is actually intended to cover. One shift was a wider focus beyond the classic scenario of a named supplier suffering physical damage from fire or flood. The event highlighted that interruption can also originate at key nodes in the system, e.g. airports, air routes, freight capacity and logistics bottlenecks, and then propagate through multiple tiers of a supply chain.

Following Eyjafjallajökull CBI fed into more practical conversations between clients, brokers and carriers around what it is actually intended to cover.

The eruption also pushed more attention to wording details. In particular: what counts as a “supplier” or “dependency”; whether prevention of access or civil authority clauses are relevant; and how losses should be treated when disruption is driven by closure and delay rather than destruction.

A further implication was increased interest in solutions that respond more directly to disruption itself. Where the main driver is loss of access or loss of transport capacity, traditional damage-based BI triggers may not match the exposure. This has supported the case for tailored supply-chain extensions, non-damage concepts in some contexts, and, in later years, parametric structures linked to observable indicators of interruption.

A long history of investigating volcanic risks

The market impact in 2010 also changed the research agenda. Volcanic risk moved from focusing purely on the impacts from primary hazards such as lava and ash, to a broader question of systemic disruption and insurability. Prior to the Eyjafjallajökull eruption, the Willis Research Network (WRN) had already been exploring the potential for loss from European volcanic risk. WRN partners from the University of Cambridge worked with in-house Willis experts to develop a risk ranking framework for European volcanoes, identifying a more consistent way in which populations may be at risk from the expected eruptions of Europe’s most dangerous volcanoes.

This research identified 10 European volcanoes with potentially affected populations greater than 10,000, and with an aggregated exposed property value at risk of US$85 billion. At the time, however, most plausible loss scenarios still focused on relatively localised impacts, including disruption to nearby airports, as seen during eruption episodes of Mt. Etna in Sicily. While historical Icelandic eruptions and aviation losses had been recognised, these were generally expected to remain on the scale of tens of millions of dollars. The scenario of a larger eruption producing enough ash to have a multinational impact on tourism, trade and wider supply chain networks was unprecedented in modern instrumented history.

In the years following the eruption, research into the risk of volcanic eruptions received much greater consideration. In conjunction with Munich Re and the University of Bristol, the WRN was involved in putting together a risk scoring framework for volcanoes around the world that was included in the 2015 Global Assessment Report on Disaster Risk Reduction (GAR).  The framework has since become an important reference point for volcanic risk assessment within the insurance and reinsurance sector.

In 2019 the WRN developed a partnership with Mitiga Solutions, a climate intelligence spin-off from the Barcelona Supercomputing Centre originally focused on modelling volcanic ash hazards to aviation. Since then, Mitiga has expanded to produce models for a range of natural hazards and has continued to collaborate with WTW on projects such as high-level risk assessment and the design of parametric insurance solutions for ground-level assets at risk from volcanic ash.

According to Lloyd’s ‘Futureset’ tool, a repeat Iceland eruption like 2010 has the potential to generate economic losses of $14bn.

Alongside the recently formed Global Volcano Risk Alliance charity, the WRN has continued conducting primary research into the financial risks of volcanic hazard. This research has highlighted the scale of potential cascading impacts from future eruptions. According to Lloyd’s ‘Futureset’ tool, a repeat Iceland eruption like 2010 has the potential to generate economic losses of $14bn, with larger eruption scenarios also causing cascading impacts to global climate, affecting industries like agriculture and shipping, and resulting in global economic impacts of between US$1.3 – 4.8tn over 5 years (0.2 – 0.7% global GDP).

Work still to be done

Industry attention on volcanic disruption risk was inevitably overtaken by the Covid-19 pandemic in 2020, which exposed many of the same vulnerabilities around interconnected supply chains, transport dependency and non-damage business interruption on a much larger scale. However, although there have been no eruptions to cause disruption at the same scale as Eyjafjallajökull in the years since, the risks are very much still present. 
Large eruption events such as Tonga in 2022 show the wide-reaching hazards of volcanoes can have a highly variable impact depending on location and infrastructure exposure.

Large eruption events such as Tonga in 2022 show the wide-reaching hazards of volcanoes can have highly variable impacts depending on location and infrastructure exposure. At the same time, increasing global trade by both air and sea means exposure continues to increase for even relatively remote volcanoes. Critical infrastructure such as submarine telecoms cables continue to develop, and an increasingly technology-reliant society means the potential for losses from business interruption caused by damage to these and the resulting outages for internet services is significant.

Against this growing exposure, the ability to model volcanic hazard has also continued to develop in both academic and industry-based research, with increased capacity for remote sensing from satellite missions, the development of AI and machine learning, and increased computer processing capacity all playing a key role. The WRN continues to partner with organisations working to understand and model volcanic hazards interaction with infrastructure systems, to ensuring that insurers and clients are suitably prepared for the next disruptive eruption scenario.

Key takeaways

• The 2010 Eyjafjallajökull eruption highlighted major vulnerabilities through disruptions to aviation and resulting losses from large volcanic eruptions
• WRN and partner research has found that cascading economic losses from future eruptions could be much higher
• Increasing global trade, tourism, offshore infrastructure and submarine telecommunications mean exposures to even remote volcanoes will continue to increase