Catastrophe Debt Market Gets First Dedicated Volcano Bonds
(Bloomberg) -- A bond sponsored by the Danish Red Cross is the first to offer dedicated insurance against volcanic eruptions, according to a statement.
The project’s partners aim to raise as much as $3 million for Denmark’s branch of the humanitarian network. Initial investors include Schroder Investment Management and Plenum Investments, a firm specializing in insurance-linked securities, according to the statement.
The payout uses a quantitative model to predict where funds will be needed based on the height of an ash cloud and prevailing winds after a volcanic eruption, but before the dust settles. Catastrophe bonds typically insure against damage from natural disasters like earthquakes and storms, with triggers based on costs already suffered.
“This is transferable to many other areas related to the whole issue around climate change,” said David Howden, chief executive of Howden Group Holdings, a placing broker in the deal. It gets “ahead of the curve” by securing money before an event causes losses, he said in a telephone interview.
The deal adds a new variant to a market that’s been criticized for failing to divert money fast enough to battle deadly waves of Ebola and Covid-19. Sold in 2017, the World Bank’s pandemic bonds eventually took losses due to the impact of the coronavirus.
The volcano project was conceived “around a table in Zurich” in November 2018, according to the partnership’s website. The bond will cover 10 volcanoes, including Mexico’s Popocatepetl and Nevado del Ruiz in Colombia.
Catastrophe bonds tend to offer high yields to investors who run the risk of losing some or all of their investment if a disaster happens. Some already include volcanic eruptions in baskets of covered perils.
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