Nevado del Ruiz Volcano Alert - The Indirect Globally Connected Consequences of Eruptions

A Newsweek article has outlined fears for a volcano often considered to be the most dangerous in the Western Hemisphere, which is giving experts cause for concern. According to the piece, the Nevado del Ruiz volcano: “which stands west of the Colombian capital, Bogotá, at an elevation of 17,457 feet above sea level", has been spewing ash plumes and steam. This indicates that an eruption could take place at any moment.

The Nevado del Ruiz volcano was responsible for what is known as the Armero tragedy. On November 13, 1985, the volcano produced an extremely explosive eruption that resulted in the deaths of more than 20,000 people in the town of Armero in what was the second-deadliest volcanic eruption of the 20th century.”

In comparison with the previous 1985 eruption, there are much better warning systems in place so that scientists can inform residents of impending danger, which means that it should be possible to help prevent the terrible loss to human life witnessed previous. The wider, economic and geopolitical connected impacts of major eruptions, however, are much more difficult to predict and protect against.

Havoc Across the Globe

Volcanic eruptions make up a fifth of all natural disasters, according to an Australian Geographic article on the world’s ten most devastating volcanic eruptions. Volcanic eruptions destroy whole cities, alter global climate and devastate economies. They can wreak havoc across the globe for years after.

Like the earthquake Richter scale, volcanic eruptions are measured using the Volcanic Explosivity Index (VEI), ranked from 1 to 8. 1 is ranked as gentle outpouring of lava and 8 a mega-colossal explosion.

“Crops can be buried by ash or animals poisoned by chemicals in the ash,” says Kelsie Dadd, an expert in the field of volcanology at the University of Sydney. “Large eruptions can be devastating because of the temperature decrease, which can cause crops to fail over large areas”, according to the Australian Geographic article, which also notes that volcanic eruptions can also be destructive for economies. It is hard to measure the economic cost of ancient eruptions, however, the costs of more recent eruptions are calculated according to loss of infrastructure and income to people in the area.

Are the impacts of volcanos worse than hurricanes?

A United Nations study found that between 1995 and 2015, volcanic eruptions cost $152.6 billion in damages, roughly $7.6 billion a year.

That is a significant loss amount, however, it pales in comparison with other storm or natural disaster events, such as hurricanes, tornadoes or floods. By way of comparison, the category three Hurricane Katrina, which began in August 2005, was the costliest tropical cyclone in the United States in at least seven decades, with costs totalling 186.3 billion U.S. dollars (when adjusted to 2022 dollars).

That single event alone is significantly more in terms of economic losses than the $152.6 billion in damages across a 20-year time span mentioned above. The most recent hurricane to make the list of costly tropical U.S, cyclones is Hurricane Ida, ranking number five, with costs amounting to 78.7 billion dollars according to Statista.

Climate change is expected to make hurricanes both more frequent and more intense.

A NatCat property (re)insurance underwriter would naturally be appalled by the devastation and wrecked human lives caused by volcanoes locally but possibly underwhelmed by the global scale of such economic losses, particularly as they pertain to his/her underwriting portfolio losses. Economic losses are not just limited to the local property market, however, and the indirect consequences of large eruptions, can end up affecting the balance sheets of corporations and ultimately (re)insurance underwriting portfolios across multiple lines of business.

Deadliest Eruptions in Human History

Australian Geographic notes that Mt. Tambora is the deadliest eruption in recent human history, “claiming the lives of up to 120,000 people. Thanks to the enormous amount of SO2 emitted, the world experienced a severe temperature drop that led to global crop failures. Thousands starved to death in China while typhus spread across Europe. In the two years after the explosion, the price of grain in Switzerland more than quadrupled.”

The devastation of the 1783 Laki eruption in Iceland was felt globally for years after the event. The volcano released enough SO2 to cause acid rain and global temperatures to drop. The eruption resulted in a famine that killed over 10,000 Icelandic people, roughly a quarter of the country’s population at the time. As Laki’s toxic eruption travelled south, it killed 23,000 in Britain and caused a famine in Egypt. Some environmental historians believe the European famine caused by the eruption may have been a catalyst for the French Revolution.”

More recently, and thankfully, less apocalyptically, the 2010 eruption of Eyjaflallajokull in Iceland resulted in the largest air-traffic shut-down since World War II, with over 100,000 flights cancelled, costing the airline industry worldwide an estimated US$1.7 billion.

There are numerous examples of other historic eruptions going back to the Santorini volcanic eruption around 1600 BCE. It was one of the largest (VEI=6) and most studied volcanic explosions in human history. It ejected about 60 km3 of magma, causing earthquakes, tsunamis, and pyroclastic flows that destroyed the Minoan civilization and affected the Eastern Mediterranean region.

However, it is becoming increasingly clear that direct damage only represents a portion of the total cost of natural hazard events, explains an article in Actuaries Digital, which notes that: “Indirect disruptions, both social and economic, contribute significant losses and in some cases these can be greater than the direct damage itself.”

Supply chain disruption and accumulation of risk

According to the Actuaries Digital article: “In terms of business interruption the situation is further aggravated when multiple branches of industry are supplied by a small number of highly specialised manufacturers. When manufacturers are concentrated within a single geographical area, insurers face an accumulated exposure to a single loss event (Asia Insurance Review, 2014). The Thailand floods and Tohoku earthquake and tsunami in 2011 highlighted the enormous accumulation potential of supply chain disruptions and showed insurers and reinsurers how exposed they were to contingent business interruption (Asia Insurance Review, 2014, Greeley, 2012).”

The article asks the question: “Can the insurance industry keep up with an increasingly interconnected and volatile world, where the cost and reach of disruptions will only increase? There is still debate within the industry over the future of contingent business interruption coverage and in some cases insurers have not responded to this challenge at all (Galey et al., 2002, Miller Insurance, 2012). On the other hand some sectors are making amendments and calling out for more transparency from their customers.

Indirect Disruption

The conclusion is that: “In order to truly understand the price of indirect disruption, the industry needs to thoroughly examine each company’s suppliers and the location of these suppliers, in order to identify vulnerabilities in their production and distribution process (Asia Insurance Review, 2014). Both direct suppliers and their subcontractors should be included in risk assessments (Asia Insurance Review, 2014).  Secondly, underwriters should also identify as many threat scenarios as possible involving different hazard events and possible exposure accumulations (Galey et al., 2002).”