In a recently published paper, Oramas-Dorta et al. examine the use of parametric risk transfer mechanisms for volcanic risk, building a volcanic ash fall risk model for six volcanoes in Japan on the basis of which a parametric risk solution for Mt Fuji is designed. As part of the study, the authors use JBA rainfall data to calculate the contribution of rainfall in terms of amplifying damage from volcanic ash.
Parametric risk transfer is a type of insurance that pays out to a policy holder when a predefined ‘trigger’ event occurs. Unlike traditional indemnity insurance which is triggered by actual loss sustained, parametric insurance is triggered when a pre-agreed threshold is met or exceeded. The trigger event has measurable physical characteristics, for example, the magnitude of an earthquake or the category of a hurricane. It’s a quick and simple way to get money to a region affected by a major catastrophe that only depends on the event and is unrelated to assets and infrastructure.
Since the 1990s when parametric cat bonds were first available, parameter choice has become more sophisticated. For example, instead of an earthquake cat bond being triggered by an event defined by magnitude, epicentre location and focal depth, now, parametric indices that are better correlated to losses might be used – this could be ground acceleration measured at a specific number of seismometers in a region.
Find out more about parametric insurance.
Building damage from volcanic ash comes in many forms. For example, extra ash load on a roof, in gutters or in drains can cause roof collapse, especially when the ash is wet. Ash can also cause corrosion if it has an acidic surface. If ash gets into heating, ventilation or air-conditioning systems, it can cause them to break down and for ash to enter into a building where it can cause even more damage. Ash can also impact transport systems, water supply, sewage systems, power supply, communication systems and agriculture.
Until now, only one parametric risk transfer solution has existed for volcanoes – a product that pays out up to USD $10 million for business interruption caused by a level 3 or above eruption alert as determined by the Japan Meteorological Agency. However, this paper proposes a parametric risk transfer tool, not based on the level of volcanic eruption alert, but based on measurable, objective characteristics that are better correlated with loss: the height of the eruptive column and the predominant direction of ash dispersal.
The eruptive column is a cloud of volcanic material emitted during an explosive volcanic eruption. Some exceptionally explosive eruptions have caused an eruptive column to ascend over 40km into the atmosphere. The direction the wind is blowing during a volcanic eruption, as well as if the eruption coincides with rain, will have a significant impact on where damage occurs and its severity.
A volcano risk model is a prerequisite to designing a reliable parametric insurance solution to find out which physical parameters correlate well with potential losses.
JBA’s rainfall data is used in the hazard component of the volcano risk model to estimate potential compound damage. If volcanic ash coincides with rainfall, the ash could become saturated and increase in weight, causing greater damage to buildings and infrastructure. As well as ‘dry’ ash footprints, Oramas-Dorta et al. produce ‘wet’ ash footprints that are created using rainfall patterns of the study region, in the form of 10,000 years of simulated daily precipitation that incorporates tropical cyclone and non-tropical cyclone sources.
The results from the volcano loss model show that the height of the eruptive column correlates strongly with the logarithm of modelled loss. The correlation holds for all dispersal directions (east, north, north-east, north-west, south, south-east, south-west, and west). Scatter in the results is caused by other factors such as duration of the eruption and size of eruptive particles.
Based on the results, the authors design a binary and multi-layer payment trigger that they apply to Mount Fuji in Japan – when looking at the losses for each of the six volcanoes, Mt Fuji is found to be the main source of risk, with its Average Annual Loss exceeding 1 billion JPY per year.
Oramas-Dorta et al. discuss the ease with which this approach could be applied globally if eruptive column height and ash dispersal direction are reported by an official, reputable agency and a volcano loss model is available for the region of interest. As with earthquake risk, it’s important for volcanic events to be reported by an official agency, to ensure consistency in reporting of triggers. It’s also important that the wording of the insurance contract names the agency that will report the physical triggers, so there is no debate when it comes to payment.
Alongside providing rainfall data for this research paper, JBA has supported parametric insurance policies for flood through partnerships with Flood Flash and Global Parametrics. JBA’s probabilistic flood modelling and flood forecasting helps with the design of parametric indices by quantifying the risk of flooding, monitoring live river flow conditions, and producing real-time high-resolution flood extent and depth footprints to determine whether trigger thresholds have been met. You can find more information on these partnerships here and here.
You can read the full paper from Oramas-Dorta et al. here: https://nhess.copernicus.org/articles/21/99/2021/
For more information on how our flood data can help you with your insurance or disaster risk reduction needs, please get in touch using the form below.
