Repost: Betting on the Chances of a Catastrophe (March 13, 2023 1625 UTC)

Update, March 13, 2023, 9:25 a.m., Pacific: This is the first time I’ve noticed news about the bond in relation to an ongoing eruption.

From this story:

The ten volcanoes covered by the Danish Red Cross sponsored and Replexus issued catastrophe bond all have at least 700,000 individuals living within 60 miles (100km) radius of a potential eruption.

Mount Merapi on the island of Java in Indonesia is one of the volcanoes covered under the catastrophe bond.

The volcano erupted on Saturday and blanketed several villages with ash, while lava and gas were spewed into the sky as well.

A lava flow of up to 7 kilometers long has been cited, while a column of hot cloud rise to more than 100 meters high.

Merapi is considered a very active volcano and so is under constant monitoring. At this stage, this eruption does not appear to pose a specific threat to the catastrophe bond, but it deserves watching as Merapi has quickly gone from minor to violent eruptions in the past.

2,963 metre-high Merapi is considered one of the most active volcanoes in Indonesia and had already been placed on the country’s second-highest level of alert for potential eruptions. An eruption in 2010 killed over 350 people.

As for that last statement, from my reading I understand that Merapi can quickly switch from effusive (lava) to explosive eruption style (increasing the risk of surges and longer pyroclastic flow runouts).

That can increase casualties, as in 1994.

But the subplinian-style eruption in 2010, as this layperson understands it, had a different cause: the rapid ascent of a large volume of volatile-rich magma. This happens on average once to twice a century.

September 2021 repost

With the summer’s natural disasters so massive already, thought it would be a good time to again share this April post on the catastrophe-bond market. It focuses on volcanoes, so here are recent articles from an industry leader (see last link in post below) on Hurricane Ida (double-digit billions of dollars) and Europe’s floods and US wildfires. They last addressed the Caldor Fire — currently threatening South Lake Tahoe communities and forecast to cross the state line into Nevada tonight or early tomorrow unless firefighters are successful and lucky — on August 18th; any updates will probably appear here.

The Danish Red Cross has gone swimming with sharks. Don’t reach for a life preserver, though. This might be a very good thing.

That is, if it works as planned.

In brief, to raise $3 million for relief efforts after a covered eruption, they recently issued what is reportedly the world’s first volcano-disaster catastrophe bond.

To trigger a payout, the eruption must meet certain requirements and happen at one of these volcanoes:

Links go to each volcano’s eruption history page on the Global Volcanism Program’s website, in case you want to try figuring out the chances of a catastrophic event yourself. (The insurers use much more sophisticated methods, but the GVP information is interesting and there are more details about the volcano available, if you’re curious.)

You might be wondering how betting on an eruption could be a good idea, with so many of these fire mountains already in action now.

Well, as the GVP eruption histories show, those listed volcanoes, except for Mount Cameroon, erupt frequently and moderately (VEI 1 or 2, per the GVP site) but do have a few big eruptions — at least VEI 4 — in their past.

At Mount Cameroon, whose known events have been in the VEI 2 to VEI 3 range, there are lots of people living on the volcano’s lower slopes. Intense development is occurring there, too. (Del Marmol et al)

The presence of human beings and their stuff is what turns any natural process into a disaster. And large populations surround the other volcanoes on this list, too.

All volcanoes on the list are dangerous; they have destroyed property and killed many people. But except for Merapi in 2010, none has caused a broad-scale catastrophe recently — thousands of years have passed since their last VEI 4’s and 5’s.

And Mount Merapi tends to have about a century of relatively quiet behavior between its subplinian to plinian episodes, so the chances for another major disaster here are low right now.

So investment groups, looking for the high rate of return that catastrophe (or cat) bonds bring, are gambling that low-level volcanic activity is all that will happen over the next three years.

The Danish Red Cross, on the other hand, is risking nothing up front but will get some or all of that money to use in relief work if a qualifying eruption does occur before the bond matures in March of 2024.


If everything plays out as expected by the people who thought up this volcano cat bond and brought it about.

No one can be sure what any volcano will do at any given moment. And I don’t know what volcanologists would say about the bond’s payout triggers.

Volcanoes are notoriously difficult to predict, let alone interpret.

But there is nothing wrong with the basic idea: giving humanitarian groups access to some fraction of the billions of dollars now invested in the catastrophe bond market as well as setting up a scheme that could release badly needed relief funds even before the ash stops raining down.

Mount Merapi in 2010.

Featured image: Nevada Fire Cameras


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