No Material Impact on Insurance Industry from Icelandic Volcanic Eruption


Extracted from "Moody’s Weekly Credit Outlook", dated April 26, 2010.

A cloud of ash and steam rises from the Eyjafjallajokull volcano behind a family farm in IcelandOn 15 April, the Eyjafjallajökull volcano in Iceland erupted, sent a cloud of ash to Europe, and caused a significant disruption for those individuals and businesses reliant on air travel. However, the extent to which the insurance industry will cover losses incurred from this disruption is expected to be limited because business-interruption claims will not be generally covered.

From an aviation perspective, business-interruption insurance claims are only valid for airlines and airports if there has been physical damage to their property. This has not been the case since the rapid closure of so many airports prevented any aircraft losses that might have occurred.
This physical damage prerequisite in fact extends to other commercial lines’ insurance. Munich Re, for example, has publicly stated that business-interruption claims arising from the non-delivery of air-freight shipments are also expected to be extremely limited for the insurance industry as covers are generally triggered only if an interruption results from material damage. It added that 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.

An area from which claims will certainly emanate is travel insurance. Again, the impact on the industry should be relatively muted for three reasons.

1) Travel insurance is typically a small business line for medium- and large-sized insurers and therefore for the industry as a whole.

 

2) It is not clear that all travel policies for individuals will be triggered. As the Association of British Insurers (ABI) has clarified, a volcanic eruption is not a specific insured event that is covered in policies, although depending on how comprehensive the cover is and the terms and conditions, delay and abandonment may be covered by the insurer.

3) If travel policies do respond, the limits are usually fixed and relatively small. In turn, any ex gratia payments made by insurers for reputational reasons are likely to be small.

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