Expert Risk Articles

Eyjafjallajökull volcanic eruption

On April 14, 2010 a volcanic eruption at Eyjafjallajökull created an ash cloud which caused enormous disruption to air travel across western and northern Europe. One year on, Volker Muench, member of the Chief Underwriting Office for Property at Allianz Global Corporate & Specialty, discusses the impact of this event on the global insurance market.

The ash cloud was a unique event, what are the key things that insurers and their clients have learnt from this?

Volker Muench: The main thing that insurers and clients have learned is that there are certain situations, and not necessarily typical perils such as earthquakes, floods or windstorms, that can interrupt businesses across huge geographical regions. What is hugely important is that we are more perceptive to interruptions to the supply chain. Our customers rely on continuous streams of supplies reaching their businesses and their clients, the volcanic ash cloud prevented many of our clients from accessing supplies that are critical to their business. We can see exactly the same thing now happening in Japan - the dependency on supply chains is increasing tremendously.


Eyjafjallajokull ash cloud: caused enormous disruption to air travel


What were the insurance implications of this event?

Muench: At the time of the event there was virtually no cover available as standard business interruption policies do not cover non–physical damage. The primary interruption was a result of the air space authorities’ decision to make flight paths unavailable; this had a knock-on effect on business across Europe.

Looking at how this affects industrial lines insurance, in addition to classical property damage and business interruption cover, the insurance industry needs to go one step further to create products, be it insurance cover or alternative risk transfer solutions, which focus more closely on the needs of large clients with international distribution networks.

This challenge will determine the future direction of industrial insurance – what solutions can we offer outside of traditional insurance policies? The ash cloud event was a wake-up call for large companies. They realized that they need sufficient balance sheet protection as some events are unavoidable.

How did businesses cope with this disruption?

Muench: It was clear that smaller commercial lines clients were less prepared. To a certain extent large clients are always prepared for general supply interruptions but not necessarily for an ash cloud. Contingency planning for general supply interruptions is standard when it comes to drawing up business continuity plans. Did companies have an answer for an event of this magnitude? Most likely not. Business continuity planning tends to focus more on traditional problems like power outages or a supplier going out of business, not on a whole region being inaccessible. The ash cloud was unique and its widespread impact could not have been predicted.

How much did this event cost the European economy?

Muench: The EU transport commissioner stated that the Eyjafjallajokull eruption led to more than 100,000 flights being cancelled, and more than 10 million passengers unable to travel. He estimated that the disruption caused by the Icelandic volcanic ash cloud cost aviation firms across Europe up to €2.5bn*. However, this figure does not take into account the impact on all affected businesses, for example, on those who rely upon importing and exporting goods.

How has the ash cloud event affected thinking at AGCS with regard to its clients?

Muench: Firstly, we are focusing on developing coverages that can respond to some of the non-physical events that have the potential to affect our clients. This event highlighted the clear need for us to offer more flexible cover to ensure our customers are protected against worst-case scenarios. The challenge, however, is that these coverages must meet client demand and that the risk price must still be acceptable to our clients.

Secondly, it has shown that, when talking to our clients, we need to focus more on the quality of their business continuity plans, especially with regard to industrial clients. We check whether their BCP follows certain standards, such as BSI 25999 (British Standard), which provide a structured way of identifying potential impacts that threaten an organization and provide a framework for building resilience, which, in turn, safeguards the interests of its key stakeholders. A client who has a solid BCP, also has a lower potential in case of a classical Damage BI loss.

Thirdly, we are talking to our potential partners, in order to raise awareness of the emerging risks in the market. For example, political unrest and power outages are all issues that can affect large geographical regions - we are seeking feedback from our clients on these, in order to develop products for that are fit for purpose for the foreseeable future.

What are other scenarios that could lead to a similar situation where clients are affected across international boundaries?

Political risks are perhaps our biggest concern. We are seeing whole regions brought to a standstill and becoming inaccessible because of political change and unrest. The recent uprising in Egypt is a good example as the country is a gateway to Africa and Asia – what do clients do when this gateway is blocked? Indeed, the Egyptian Finance Minister recently stated that the country’s economic growth forecast for 2011 has halved as a result of the impact on the tourist industry and the uncertainty over future foreign investments**.

Increasingly governments are revoking trade permits and implementing import and export restrictions – this has a massive impact on business interruptions. We are also increasingly seeing service interruptions such as black-outs and IT outages. Pandemic events are also on the horizon which could cause products to be seized for isolation and quarantined because of export restrictions.

There are quite a few potential issues but also many opportunities. Clearly some hazards are simply not insurable - but could be covered by an alternative risk transfer and effective continuity planning.