The Danish Red Cross sponsored volcano catastrophe bond is being watched, as Indonesia’s Mount Merapi volcano erupted over the weekend.
Mount Merapi in Java, Indonesia began spewing lava and gas into the air this weekend and the volcano is one of those covered under the risk transfer agreement of this innovative volcanic risk cat bond.
The catastrophe bond transaction, Dunant Re IC Limited (Series 2021-1), was the first to cover pure volcanic eruption risk and was issued in 2021 for the Danish Red Cross.
The volcano catastrophe bond provides coverage for the risk of eruption, across 10 named volcanoes, spread over three continents around the world.
The issuance of $3 million of notes raised funds from specialist cat bond investors, with the structure designed to help in the delivery of aid by sponsor the Danish Red Cross, in the aftermath of an eruption severe enough to breach the parametric trigger used within the structure.
The ten volcanoes covered by the Danish Red Cross sponsored and Replexus issued catastrophe bond all have at least 700,000 individuals living within 60 miles (100km) radius of a potential eruption.
Mount Merapi on the island of Java in Indonesia is one of the volcanoes covered under the catastrophe bond.
The volcano erupted on Saturday and blanketed several villages with ash, while lava and gas were spewed into the sky as well.
A lava flow of up to 7 kilometers long has been cited, while a column of hot cloud rise to more than 100 meters high.
Merapi is considered a very active volcano and so is under constant monitoring. At this stage, this eruption does not appear to pose a specific threat to the catastrophe bond, but it deserves watching as Merapi has quickly gone from minor to violent eruptions in the past.
2,963 metre-high Merapi is considered one of the most active volcanoes in Indonesia and had already been placed on the country’s second-highest level of alert for potential eruptions. An eruption in 2010 killed over 350 people.
The Danish Red Cross’ volcano catastrophe bond utilises a parametric trigger that takes into account both the height of any volcanic eruption ash plume and the wind direction, to define where ash would fall and as a result where any disruption or damage is most likely to be.
The idea of the parametric trigger, is so the catastrophe bond can pay-out quickly for specific scenarios where aid from humanitarian funds are expected to be required for the region.
The innovative transaction enabled the Danish Red Cross to pre-fund part of its humanitarian aid response financial needs for volcanic eruption risk, using a securitized capital markets instrument and backed by cat bond investors.
At the moment the plume height from the eruption of the Merapi volcano is not sufficiently high to activate the cat bond. But with Merapi thought likely to remain active, this particular volcano is likely to be monitored closely for any increase in threat to the cat bond sponsored by the Danish Red Cross.
You can read all about this first volcanic risk catastrophe bond, the Dunant Re IC Limited (Series 2021-1) transaction in our extensive Deal Directory, where you can find details of every cat bond issued.
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