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Merapi eruption needs to hit 12km high to trigger Danish Red Cross cat bond


The eruption plume or column from Indonesia’s Mount Merapi would need to reach at least 12km high, for the Danish Red Cross sponsored Dunant Re IC Limited (Series 2021-1) catastrophe bond to be triggered, risk modeller Mitiga Solutions has explained.

mount-merapi-volcanoWe reported earlier this week that the Danish Red Cross sponsored volcano catastrophe bond is being watched, as Indonesia’s Mount Merapi volcano erupted over last weekend.

Now, the risk modeller and calculation agent for that cat bond deal, Mitiga Solutions, has provided some additional insights to help the market understand how to think about this eruption of the Merapi volcano and whether it is really any threat to the Red Cross cat bond, or not.

At this stage, Mitiga Solutions explained that it has so far received alerts from its automatic system that ash clouds have been observed up to 3km high above the summit of Merapi, on March 11th and 12th.

This caused localised ash fall and was caused by pyroclastic flows that travelled around 2km down the volcano’s flanks, Mitiga said.

Further explaining its role in continually monitoring the volcanic eruption, the risk modeller said, “Mitiga continues to watch the activity closely, as Merapi is one of the 10 volcanoes included in our worldwide volcano cat bond.

“Mitiga provided the risk modelling (+calculation agent) for this very first catb ond covering pure eruption risk that has been brought to market by Replexus and Howden Capital Markets, through Replexus’ Dunant Re reinsurance structure using its blockchain based ILS platform.

“The bond would be triggered at Merapi for an eruption column height of 12km above the vent. An eruption like that would have devastating effects on the area, as ash fall can be expected even hundreds of kilometres away from the volcano.

“The economic impact of such heavy ashfall over wide areas, combined with expected damage closer to the volcano due to pyroclastic flows, would be immense, with modelled losses of hundreds of millions of dollars.”

If the eruption column height reached that 12km level, the Danish Red Cross volcano cat bond would be triggered and funding could be released to it, as the sponsor, Mitiga further explained.

As a result, the funding from the cat bond could be put to work in provision of disaster relief within hours, a clear benefit of a parametric trigger.

In addition to the risk modelling and calculation agent services that Mitiga Solutions is providing or the Danish red Cross volcano cat bond, the company offers other services of use in disaster relief and recovery situations.

“Mitiga also provides state-of-the-art short-term forecasting for volcanic fallout. Based on the current wind field and eruption source parameters as they become available, our models predict the spatial and temporal development of tephra fallout on the ground and concentrations of airborne ash, which supports humanitarian actions and emergency management in an eruptive crisis,” the company said.

Also adding that, “Mitiga is currently working on extending this work, by both adapting it to new regions (like the Caribbean) and to the inherent multi-hazard environment of a volcanic eruption, which can include lava flows, pyroclastic flows, mudflows and more in addition to ash fall.”

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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