Public Disclosure Authorized Feasibility Assessment of Parametric Insurance for Volcanic Unrest and Volcanic Eruption Public Disclosure Authorized Component 2 Technical Report GNS Science University of Bristol Willis Towers Watson Public Disclosure Authorized 14 February 2019, Final Version Public Disclosure Authorized Feasibility Assessment of Parametric Insurance for Volcanic Unrest and Volcanic Eruption A project for the World Bank World Bank Contract: 7186879 VIP: Component 2 Technical Report 14 February 2019, Final Table of Contents Executive Summary ...............................................................................................................................1 1 Introduction .......................................................................................................................................3 2 Volcano unrest indicators and potential parametric indices .......................................................5 2.1 Quantitative unrest indicators...................................................................................................6 2.1.1 Ground-based volcano monitoring ..................................................................................6 2.1.2 Space-based volcano monitoring ....................................................................................8 2.2 Synthesising products ..............................................................................................................9 2.2.1 Volcano Alert Level .........................................................................................................9 2.2.2 Other synthesising products ......................................................................................... 10 2.3 Volcano unrest response and evacuation considerations .................................................... 15 2.4 Current capabilities in focus countries .................................................................................. 16 2.4.1 State of volcano monitoring in focus countries ............................................................ 16 2.4.2 Volcano Alert Levels in focus countries ....................................................................... 23 2.5 Candidate unrest indicators for use in parametric insurance................................................ 24 2.5.1 Enhanced preparedness .............................................................................................. 24 2.5.2 Evacuation support....................................................................................................... 26 2.5.3 Pre-VAL increase trigger .............................................................................................. 27 2.6 Conclusions ........................................................................................................................... 27 3 Resources required to respond to volcanic unrest ................................................................... 29 3.1 Pre-VAL increase resourcing ................................................................................................ 29 3.2 Enhanced preparedness ....................................................................................................... 29 3.3 Evacuation support ............................................................................................................... 30 4 Unrest product design .................................................................................................................. 31 4.1 Description of proposed structure ......................................................................................... 31 4.1.1 Early trigger based on VAL .......................................................................................... 32 4.1.2 Evacuation Call as main trigger ................................................................................... 33 4.1.3 Scaling pay-out amounts .............................................................................................. 34 4.2 Testing the design concept ................................................................................................... 37 4.2.1 Agung, Indonesia, 2017 ............................................................................................... 37 4.2.2 Kelut, Indonesia, 2014 ................................................................................................. 37 4.2.3 Merapi, Indonesia, 2010 ............................................................................................... 38 4.2.4 Sinabung, Indonesia, 2010-present ............................................................................. 38 4.2.5 Pinatubo, Philippines, 1991 .......................................................................................... 39 4.2.6 Rabaul, Papua New Guinea, 1994............................................................................... 39 4.2.7 Niuafo’ou, Tonga, 1946 ................................................................................................ 40 4.2.8 Ambae, Vanuatu, 2017/18 ........................................................................................... 41 ii VIP: Component 2 Technical Report 14 February 2019, Final 4.3 Basis risk ............................................................................................................................... 41 4.4 Conflict of interest concerns .................................................................................................. 42 5 Probabilistic analysis .................................................................................................................... 46 5.1 Analytical framework ............................................................................................................. 46 5.2 Practical application of framework ........................................................................................ 47 5.3 Underwriting analysis ............................................................................................................ 49 5.3.1 General assumptions ................................................................................................... 50 5.3.2 Results ......................................................................................................................... 50 6 Implementation .............................................................................................................................. 56 6.1 Term Sheet............................................................................................................................ 56 6.1.1 Information for Policy Schedule ................................................................................... 59 6.2 Methodology for trigger probability assessment ................................................................... 60 6.3 Market approach to pricing.................................................................................................... 61 6.3.1 Expected Loss .............................................................................................................. 61 6.3.2 Capital Load ................................................................................................................. 62 6.3.3 Expense Load .............................................................................................................. 63 6.3.4 Conclusion .................................................................................................................... 63 6.4 Other implementation issues................................................................................................. 64 6.4.1 Risk transfer vehicle(s) ................................................................................................. 64 6.4.2 Narrative for risk-takers ................................................................................................ 65 6.4.3 Additional implementation factors ................................................................................ 66 7 Recommendations for further work ............................................................................................ 67 7.1 Supporting volcano observatories ......................................................................................... 67 7.1.1 Increasing redundancy in staff expertise ..................................................................... 67 7.1.2 Capacity building of staff .............................................................................................. 67 7.1.3 Increased real-time instrumentation and resources for long term maintenance .......... 67 7.1.4 Increased diversity of monitoring methods .................................................................. 68 7.1.5 Strengthening international collaboration between VOs .............................................. 68 7.2 Establishing ‘background’ activity ......................................................................................... 69 7.3 Using parametric triggers for non-insurance financing ......................................................... 69 7.4 Product refinement ................................................................................................................ 69 7.5 Databases and further research ........................................................................................... 70 Annexe 1: State-of-the-art for volcano monitoring .......................................................................... 71 Annexe 2: Volcano Alert Level systems