Volcanic eruption in Iceland, airborne ash and insurance cover

2010/04/16

The renewed eruption of the Eyjafjallajökull volcano has led to widespread shutdowns and cancellations in Europe’s air traffic, yet is not expected to give rise to significant losses for the insurance industry.

Located beneath a glacier, the volcano erupted for the second time in the last four weeks on Thursday. This second eruption was more than ten times more powerful than its predecessor, however, and produced explosive effects when hot lava from the eruption came into contact with meltwater from the glacier. A gigantic cloud of ash shot kilometres upward into the atmosphere before being carried by the wind toward northern and central Europe.

Even though the eruption makes a spectacular impression, it is not expected to cause major losses the insurance industry. Its effects have been felt primarily in air traffic, as the engines of aircraft passing through the oxygen-depleted cloud of ash could stall. Air traffic authorities in the region have closed their respective air spaces in order to prevent this from happening, and there is consequently no reason to reckon with accidents or losses. Interruptions in the business operations of airlines and airports, in turn, are generally not covered unless they result from material damage.

Munich Re can offer airlines cover against such air traffic interruptions due to force majeure – as in the present case because of the cloud of ash or due to snowfall. Given sufficient demand for such cover, the Group’s know-how could in future help to ameliorate the consequences of such interruptions for airlines.

Business interruption claims arising from the non-delivery of air-freight shipments are also expected to be extremely limited as here, too, covers are generally triggered only if an interruption results from material damage. Other claims, for instance in agriculture or property damage caused by corrosion or dust deposits, are not expected either, as the concentration of ash in the cloud is too low.

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