Waiting to Erupt
Hawaii’s Mt. Kilauea was one of several major volcanic eruptions in 2018. Though insured losses from these events were low, insurers are creating new ways to assess and address volcano risk, including the development of parametric products and an exposure-based probabilistic volcano model.
- Lori Chordas
- June 2019
Photo by USGS Hawaiian Volcano Observatory
- Ready to Blow: Volcanic eruptions are low-frequency events but can have high-severity consequences.
- Eruption of Claims: The insurance industry was relatively unscathed by the 2018 eruption of Hawaii’s Mt. Kilauea; however, the eruption did signal some coverage gaps in homeowners insurance policies.
- Take Cover: While insurers are delegating dollars and efforts to other natural catastrophes, experts say volcanic eruption is a real risk that the industry needs to be paying closer attention to.
Ash, toxic gases and a river of lava flow spewed from Mt. Kilauea in Hawaii, swallowing up hundreds of homes.
One of the five volcanoes on Hawaii's Big Island, Mt. Kilauea has been erupting consistently since 1983 after sitting dormant for a number of years. On May 3, 2018, however, it reached its breaking point.
For months, Kilauea erupted and overflowed, its lava lake spilling over the edge of the crater and snaking toward the Pacific like a molten river of orange and black.
Meanwhile, in Guatemala, Volcan de Fuego experienced its deadliest activity since 1929, with a series of eruptions and pyroclastic flows devastating the surrounding area. Shinmoedake peak in Japan, Anak Krakatau in Indonesia and Mount Etna in Italy also erupted in 2018.
Those are just a few of the 1,500 potentially active volcanoes worldwide, nearly 500 of which have erupted in historical time, according to the United States Geological Survey. A scientific agency of the U.S. government, USGS studies the nation's landscape and its natural resources and hazards. An active volcano is a volcano that has had at least one eruption during the past 10,000 years.
Today, nearly one billion people live within 93 miles of a volcano, and volcanic ash fall is a serious threat on global economies and infrastructure, according to a 2017 Swiss Re annual report.
Yet, despite those facts, volcanoes are an often-overlooked catastrophe risk.
“Many people fail to give much thought to volcanoes, especially in the U.S.,” said Maiclaire Bolton Smith, a senior leader of research and content strategy at global property analytics solutions provider CoreLogic.
The United States is home to more than 160 active volcanoes, including 98 in Alaska, 21 in California and 16 in Hawaii, according to reports. And the USGS warns that volcanic eruption could be the next “big hazard” in California.
The agency predicts there's a 16% chance of a small- to moderate-size volcano erupting in California over the next 30 years. That's almost the same likelihood as a 6.7 magnitude earthquake hitting the Golden State in the next three decades, USGS reports.
The state has already been rocked by nearly a dozen volcanic eruptions over the past 1,000 years. In 1915, venting of Lassen Peak devastated areas in nearby Redding and rained volcanic ash as far away as Nevada.
Lassen Peak is one of seven active volcanoes in California that the USGS warns are at risk for future eruption.
Threats like those have long been on insurers' radars. However, the infrequency of those events has led insurers to instead focus on other recurrent natural perils such as hurricanes, earthquakes and floods, said Janet Ruiz, director of strategic communications at the Insurance Information Institute.
Last year's eruption of Mt. Kilauea shined a new spotlight on volcano risk.
Estimates of lost revenue from property taxes and reduced property values from the event vary; however, some reach as high as $6 million, according to news reports.
While Kilauea didn't have a major impact on the insurance industry, it did signal some gaps in insurance coverage and the potential threat of future losses generated from volcanoes.
Future eruptions may reveal even more coverage gaps that need to be filled.
Insurance Information Institute
Filling the Gaps
More than 700 homes were destroyed during Kilauea's eruption, leaving residents to scramble for answers as to whether their homeowners insurance would cover damage caused by residual risks such as lava and ash.
That answer, industry experts say, depends on the policy and how the home was damaged.
Losses caused by a volcano-produced fire or explosion are covered under most standard homeowners policies. But that's often not the case for damages caused by lava flow, dust and ash.
While most homeowners policies exclude the removal of ash from personal properties, some policies offer limited coverage if the ash first causes direct physical loss of the property, Ruiz said.
Also, volcanic effusion, such as volcanic water and mud, is generally excluded in policies but may be covered by flood insurance through the National Flood Insurance Program, she said.
After the recent eruption of Kilauea, some residents discovered their policies either had high deductibles for lava or excluded damage from lava.
Many of the homes in the path of the lava were in Leilani Estates. The residential subdivision is located in Lava Zone 1, which is one of two high-risk areas where property insurance is limited, said Hawaii Insurance Commissioner Colin M. Hayashida.
In 1974, USGS created nine lava flow hazard zones on the Big Island. Zone 1, which includes summits and rift zones of the Kilauea and Mauna Loa volcanoes, is the highest risk zone based on risk hazard, historical flows and geography. Zone 9 is the least hazardous and includes the Kohala volcano that last erupted more than 60,000 years ago.
“Residents living in zones one and two are challenged to find coverage,” Hayashida said. “Few insurers will issue homeowners policies there.”
Instead, homeowners in those areas can turn to the surplus lines market or the Hawaii Property Insurance Association, which offers coverage up to $350,000.
HPIA is a nonprofit collection of insurers created by state legislators in 1991 to provide basic property insurance for residents unable to buy coverage in the private market.
After the May 3 eruption, HPIA announced it would issue policies to uninsured residents in affected areas with a six-month waiting period.
Several months after Kilauea's eruption, Hawaii homeowners filed a class-action lawsuit against Lloyd's and its agent-brokers for allegedly steering them away from comprehensive state-endorsed home insurance coverage to surplus lines policies that turned out to be “essentially worthless,” according to attorneys. The lawsuit is pending before the U.S. District Court for the District of Hawaii.
Kilauea also signaled another gap in homeowners coverage. Earthquakes, land tremors, landslides and mudflow caused by a volcano are typically excluded from standard policies, said Cody Webb, a consulting actuary at Milliman.
Kilauea triggered countless earthquakes, including several reaching magnitudes of 5.5 or more and a 6.9 tremor located about 10 miles outside of Leilani Estates.
“The good news is that earthquake endorsements to homeowners policies often cover those types of losses,” said Webb. However, earthquake policies sold in California by the California Earthquake Authority and many private insurers do not provide such cover, he said.
Interruption of Services
Homeowners insurance isn't the only line of business to feel the heat of a volcanic eruption. Personal insurers also received some auto claims from Kilauea.
Damage to vehicles caused by lava flow is typically covered under auto policies with comprehensive coverage, III's Ruiz said. Direct, sudden damage to engines from volcanic ash or dust is also covered under most policies.
Kilauea reminded business owners of their vulnerability to Mother Nature's wrath, too.
Last year, farmers suffered nearly $28 million in damages, according to a survey by the University of Hawaii's College of Tropical Agriculture and Human Resources. Of those losses, nearly two-thirds was damage to crops and the remaining to destroyed land, buildings and inventory.
Tourism, one of Hawaii's biggest industries and a significant part of the local economy, lost millions of dollars in revenue. Lodging and tour bookings declined 50% between May to July, airline sales plummeted and cruise ships canceled port calls.
The months-long eruption also forced the closure of the Hawaii Volcano National Park, which attracts 2 million visitors annually and generates more than $16 million in economic benefits.
Most business interruption policies cover property loss for damages caused by a volcanic explosion, shockwaves, ash, dust or lava flow, according to III. However, special endorsements to the policies are needed for direct physical damage resulting in suspended operations or for when the government shuts down the area, preventing customers or employees from gaining access to the premises.
The eruption of Iceland's Eyjafjallajokull in 2010 was a wake-up call for the aviation sector, said Alexander Allmann, a geophysicist and head of section, property at Munich Re.
During the week following the eruption, the European aviation industry grounded more than 100,000 flights across Europe in fear that ash released into the air could damage jet engines and cause mid-air collisions. The closure of airspace resulted in nearly $7.3 billion in lost revenue, according to reports.
Events like that have over the years spurred industry discussions about the development of special interruption-type coverages. Yet, only a handful exist.
Last year, Munich Re, in collaboration with easyJet, launched a coverage for airline flight cancellations. The policy provides financial protection against various large shock events, such as volcanic ash clouds and the grounding of the fleet on safety grounds, that lead to business interruption losses in aviation.
In 2016, Japanese insurer Sompo Japan Nipponkoa Insurance launched a parametric insurance product that covers losses from volcanic activity and offers businesses an extra expense caused by evacuations as a result of volcanic alerts issued by the Japan Meteorological Agency.
Parametric insurance does not indemnify a pure loss but rather makes a payment upon the occurrence of a triggering event, such as a natural catastrophe.
Guy Carpenter recently announced its specialist teams have developed a catastrophe risk model for six Japanese volcanoes, including Mt. Fuji. The model estimates losses arising from volcanic ash load on building structures in the densely populated and industrialized prefectures of Tokyo and Kanagawa.
Ongoing work entails an exploration into the potential usage of the risk model to structure parametric solutions, according to Guy Carpenter. The company said the conceptual design of a parametric risk transfer mechanism is intended to offset losses to building structures or other types of losses arising from eruptions producing ash fall. Other volcano-related risk offerings previously developed by Guy Carpenter include exposure accumulation methodologies for volcanoes worldwide.
If insurers “don’t feel comfortable with their estimation of the overall risk associated with a peril, they’ll be reluctant to insure it. Volcanoes fall into that category as a nat-cat that some insurers could be uniquely exposed to if their risk is concentrated in volcano-exposed areas.”
“If there's one thing we always learn from events like volcanoes, it's to expect the unexpected,” CoreLogic's Bolton Smith said.
The good news, she said, is that a volcanic eruption often comes with a warning, “unlike earthquakes and flash floods that can happen instantaneously.”
The challenge for the industry is that volcanoes remain a largely unmodeled peril.
“That's largely because demand for the risk isn't that extensive,” said Munich Re's Allmann.
“Also, there is no modeling because loss potentials in the range of tens to hundreds of years is significantly smaller than other perils like earthquake and storm,” he said.
Last year, Swiss Re developed the industry's first exposure-based, global probabilistic volcano model that focuses on property loss from volcanic eruptions and ash flow. The model assesses the risks of more than 500 active global volcanoes based on hazard, vulnerability, value distribution and insurance conditions.
The model is used by Swiss Re underwriters to price reinsurance treaties and single risks. It also offers a snapshot of global areas at risk of volcanic ash fall. Some of those cities include Managua, Nicaragua; Manila, Philippines; and Naples and Catania in Italy.
The model, however, has a few limitations. Its ash thickness calculation concentrates on a distance of only 93 miles from a volcano, thereby making it unable to model widespread ash distribution in the atmosphere that could impact air traffic or global climate.
Also, the model's only volcanic hazard is ash fall, so it doesn't take into account other volcanic perils such as pyroclastic flows or lava flows.
Often insurers are challenged to quantify risk, including the threat of natural catastrophes, Milliman's Webb said.
“If they don't feel comfortable with their estimation of the overall risk associated with a peril, they'll be reluctant to insure it. Volcanoes fall into that category as a nat-cat that some insurers could be uniquely exposed to if their risk is concentrated in volcano-exposed areas,” he said.
Webb suggests insurers and homeowners “pick their battles” and manage the natural perils they are most exposed to versus those with fewer vulnerabilities.
“Insurers need to understand what's covered in policies, the risks associated with an event and where their insured exposures lie in relation to a volcano. That can help lower the risk,” Bolton Smith said.
Reinsurers, too, have an important role to play.
“Risk is diversifiable and even big risks in high-risk regions can be diversified by reinsurance. Volcano risk is very high with global implications, and global risk can't be diversified in the same way as risks that only affect particular regions. For insurers, it doesn't typically impact annual operating results because of its low frequency compared to events like hurricanes,” Webb said.
“Insurers need to understand hurricanes if they're going to sell homeowners insurance in the southeastern U.S. But volcano isn't the type of risk that's going to prevent sales of homeowners insurance in the Pacific Northwest. However, if a major eruption occurs it could have big implications,” he said.
Kilauea tops USGS's recent list of the 18 “very high threat volcanoes” in the world.
Eruption of the volcano in 1955 destroyed 3,000 acres of land and cost the state of Hawaii more than $1.8 million, according to reports.
Last year's venting threatened an estimated total insured value of more than $171 million for standard market insurers in Leilani Estates, Lanipuna Gardens, Kapoho and Vacationland, according to the Hawaii Insurance Division.
Commercial insurers in those areas had total insured value of $344,600 and more than $17 million fell under “other” coverages, according to the department, which added that the figures do not include the surplus market and uninsured.
Insurers and reinsurers have remained relatively unscathed by volcanic eruptions throughout the centuries.
The biggest blow came in 1980 with the eruption of Mount St. Helens in Washington State. The colossal eruption caused 57 deaths and an estimated $31 million in insured losses, according to Munich Re.
The historic event also demonstrated that volcano eruptions can be more than just a local problem. Traces of ash from Mount St. Helens were found all over the world and some ash-particle remnants remained in the Earth's atmosphere for several years.
Future eruptions similar to that of Yellowstone that occurred 630,000 years ago could have global catastrophic effects and potentially exceed the limits of insurability, Munich Re warns.
A volcanic eruption of any size can potentially impact natural resources and infrastructure, along with possibly leading to social unrest and climate shifts that generate population die-off.
In 1815, a two-week eruption of Indonesia's Mount Tambora ejected billions of tons of debris and ash into the atmosphere, creating a volcanic winter that lowered global temperatures by 0.4 to 0.7 degrees Celsius.
“Every catastrophe teaches us something, and one of the biggest things we're now seeing is the high demand surge for rebuilding after an event,” III's Ruiz said.
While recent volcanic eruptions have so far not caused any changes in insurance or pricing, “future eruptions may reveal even more coverage gaps that need to be filled,” Ruiz said.
“The good thing is we have a lot of new companies and insurtechs creating new products like parametric insurance to help people with deductibles and to help them quickly get back on their feet. They'll also help everyone more easily adapt to things like volcanoes,” she said.
As homeowners policies improve to cover more risks, and insurers are able to retain those exposures or obtain necessary reinsurance to write those risks, “we could start to see some coverage gaps for catastrophic risks like volcanoes begin to close,” Milliman's Webb said.
Swiss Reinsurance Company Ltd. (AM Best # 085009)
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