Minimal Impact to Insurers from Icelandic Volcano Eruption

Published on April 27, 2010

At least for now, most air travel restrictions caused by the eruption of the Eyjafjallajökull volcano have been lifted throughout Europe.  Earlier reports led many observers to believe that significant insurance claims could result from this event.  However, yesterday’s report from Moody’s indicates that insured damages should be minimal.

The firm said business-interruption insurance claims are only valid for airlines and airports if there has been physical damage to their property, and this has not been the case since rapid closure of airports prevented any aircraft losses.

Moody’s added that this physical damage prerequisite in fact extends to other commercial lines’ insurance. Moody’s mentioned Munich Re’s report that business-interruption claims arising from the nondelivery of air-freight shipments are expected to be extremely limited for the insurance industry as covers are generally triggered only if an interruption results from material damage.

In addition, while travel insurance claims will occur, such coverage is not a large line for the industry as a whole and some policies may not cover interruption caused by volcanic eruptions.  Moody’s notes that in the future, insurers may find new opportunities to develop products that cover volcanic eruptions although the ability to assess the risk may present difficulties.

While eruptions of this nature are difficult for scientists to predict, the same is true of many other types of natural disasters including earthquakes.  Eyjafjallajökull’s eruption is not as large as other recent volcanic events and even an event of this size would cause far more disruption if it took place in an area such as the Pacific Northwest.  With heightened awareness of the potential risks and disruptions associated not only with immediate damages but with side effects such as business interruption and travel delays, it would seem logical for insurers to offer coverage if appropriate pricing can be estimated.

Minimal Impact to Insurers from Icelandic Volcano Eruption