Swiss Re: Volcanoes - potential disasters hiding in full view

PRESS RELEASE

By Swiss Re

March 23

The volcanic ash clouds of the 2010 eruptions of Eyjafjallajökull in Iceland cancelled 107,000 flights, stranded 10 million passengers and cost the airline industry alone USD 1.7 billion. But what if such an ash cloud not only stops air traffic but also hits a major city? What are the economic costs of destroyed houses, businesses and infrastructure?

Given that 90 of the world's 616 largest metropolitan areas are located within 150 km of a volcano, this is an important question to ask. The Mount Pinatubo eruption in 1991 is a case in point. After six centuries of dormancy, this volcano, just 100km north-west of the Philippine capital Manila, once again erupted. Shortly afterwards, a rain-laden typhoon hit the region, adding weight to the fallen ash and causing many roofs to cave in.

This second-largest eruption of the 20th century not only spewed an ash column to a height of more than 40km but also triggered avalanches of hot ash, gas and mud. Fortunately, the eruption was anticipated, allowing thousands of people to be evacuated in time to minimise the death toll. Even so, the eruption claimed 875 lives and made 250,000 people homeless. The devastation caused by the eruption and its after-effects disrupted the region's economy for many years.

Ash fall can bring economies down and cut global supply chains

Almost one billion people worldwide are faced with a scenario of this kind today, and as urban areas across the world are continuing to grow, this figure will increase accordingly. The effects of such events are not limited to the people in the disaster zone but extend to the economy as a whole: many of the cities at risk form the actual economic engine of their respective countries. Typical results of a volcanic eruption include damaged plants and production facilities, cut power lines, closed ports, airports and highways, and all of these effects can choke a country's economy.

In many cases, this can potentially take 0.5% off a country's GDP, seriously affecting its economic well-being. For example, Hurricane Sandy was the second-costliest hurricane ever to hit the US. The 2012 superstorm resulted in a financial cost of USD 72.23bn due to physical damage and destroyed over 650 000 homes. The hurricane had a significant impact on the US economy, forcing some businesses to close down in the aftermath of the storm. A large ash cloud over a major economic centre can have similar effects.

Considering all of these factors together, we decided to take a closer look at the potential threat of ash fall globally. Our experts analysed internal and external data to come up with a model able to do a ranking of cities most at risk of losing 0.5% or more of their country's GDP in the wake of volcanic ash fall. The 15 most exposed cities are shown in the map below.

As the map clearly illustrates, many of the major economic hubs of global production and trade are at risk. Tokyo-Yokohama, Jakarta and Naples feature prominently. At the same time, smaller countries, such as Guatemala, Honduras, El Salvador and Costa Rica rely heavily on their capitals for economic well-being. So what can be done to help minimize the impact of volcanic ash fall?

Let's prepare - physically and financially

First, we must be prepared. Evacuation plans and shelters need to be in place for those who may be forced to leave their homes when a volcano erupts. Building codes and zoning laws should take into account potential ash fall risks.

Second, we need to ensure redundancy. We should consider the existence of possible alternatives to keep the economy going, even if a key economic hub is no longer working. Could a second port or airport take over while the main one is closed? Are there enough supplies to ensure production even if supplies are disrupted?

Third, we should consider the availability of financial resources to rebuild and reconstruct if disaster strikes. Apart from emergency aid, insurance also plays a role here. It can provide resources fast and efficiently to businesses and private households, and in this way help them to get them back on their feet after an event.

"Our new model allows us to calculate premiums for the important risk of volcanic ash fall for people, businesses and countries," says Martin Bertogg, Swiss Re's Head Catastrophic Perils. "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."

(Read the full release here)