Large Cities Could Incur Economic Losses of up to US$30 Billion from a Volcanic Eruption

Volcanic eruption could cost large cities up to US$30 billion in economic losses, according to Swiss Re which has developed the world's first global volcano model.

The model assesses risk in the case of over 500 active volcanoes. The model enables insurers to quantify volcanic risks and to calculate expected losses from volcanic eruptions.

With one in seven of the world's largest urban areas located within a 150 km radius of an active volcano and some of the largest cities at risk of total economic losses of as much as $30 billion, quantifying volcanic risks can help cities and countries prepare for the worst.

The new volcano model says over 1 billion people live within 150 km of an active volcano. Top 10 exposed cities include Tokyo, Naples, Manila, Managua and Jakarta. Emerging markets such as Nicaragua or Ecuador would suffer severe economic disruption in case of eruption.

A missing global model in the insurance market has been the greatest obstacle for addressing the risk posed by volcanic hazards. In some countries the volcanic threat constitutes a substantial part of the insurable risks, and the ability to assess and price such risks with precision is crucial.

"As global urbanization gathers pace, the protection gap for volcanic hazards widens,” says Jayne Plunkett, CEO Reinsurance Asia at Swiss Re. “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."

Losses from volcanic eruptions are still largely uninsured, posing a significant protection gap.

Currently, only Iceland has compulsory volcano insurance; elsewhere, losses from volcanic eruptions are largely uninsured, creating a huge protection gap. The precise quantification of volcanic risks will enable adequate insurance coverage.

Martin Bertogg, Head Catastrophic Perils at Swiss Re, said: "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." 

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