The world’s first volcano catastrophe bond has launched making use of modelling and blockchain technology to offer securities against the risk of volcano-related humanitarian disasters.
500 million people worldwide live near 1,500 active volcanoes. In 2002, the eruption of Mount Etna, Europe’s biggest volcano, caused economic losses of $900million in the months that followed.
Sponsored by the Danish Red Cross, with additional support from international insurance group Howden Group Holdings’ charitable foundation Financial Lines, the new CAT bond aims to raise up to $3million from investors for aid in the aftermath of an eruption.
It will bridge the insurance gap and allow greater access to insurance and the capital markets for the benefit of the charitable sector and those affected by natural disasters.
Early investors include Plenum Investments, Schroder Investment Management and Solidum Partners.
Using modelling developed by Mitiga Solutions – Barcelona-based experts in predicting natural hazards – and blockchain technology developed by Replexus, the bond covers 10 volcanoes across three continents with at least 700,000 individuals living within 60 miles (100km) radius of a potential eruption. They include North America’s second highest volcano Popocatépetl in Mexico and Colombia’s Nevado del Ruiz, which killed 23,000 and displaced thousands when it erupted in 1985.
Alejandro Marti, CEO and co-founder of Mitiga Solutions, said: “Mitiga Solutions has developed a state-of-the-art model using numerous data inputs to predict where funds will be needed, improving both the efficiency and effectiveness of humanitarian relief. Our model can anticipate the trajectory of the volcanic ash cloud using prevailing winds to better estimate the impact and more effectively guide CAT bond proceeds.”
The bond is based on a trigger mechanism that sets in motion a pay-out whenever a volcanic ash plume reaches a certain height and the prevailing wind directs the ash fall towards vulnerable communities. It will cover humanitarian funds in advance, and allow aid to be released more quickly and effectively while offering uncorrelated returns for investors.
Replexus says it has helped to reduce costs by $200,000 to $400,000 per issue compared to traditional settlement systems with the development of a private blockchain for dematerialising the bonds. Additional benefits of the blockchain structure include allowing investors to hold their own securities on their own computer server rather than using a custody bank, and therefore saving five to 10 basis points per annum on the value of the securities they hold.
Charlie Langdale, managing director of Financial Lines for Howden Broking, adds: “The volcano CAT bond is an important addition to the insurance-linked securities market as it has the potential to revolutionise disaster relief finance. This ground-breaking innovation represents a springboard from which further products and markets can be developed.”