One of the largest Japanese domestic insurers, Sompo Japan Nipponkoa Insurance, is planning to offer travel or tourism companies and other potentially affected industries a parametric insurance product that pays out on a heightened threat of volcanic eruption.
The parametric volcanic eruption insurance will payout based on the Japan Meteorological Agency (JMA) announcing a level 3 volcanic eruption alert, which indicates a high risk of eruption and that a volcano should not be approached.
Japan has a large number of volcanoes that are still considered active, despite many having been dormant for years. The famous Mt. Fuji and surrounding region is a prime example and will be the first area targeted for the sale of this insurance product.
Sitting in a location with numerous resorts and hot spring destinations, such as Hakkone, that would lose significant economic activity due to a decline in tourism should an alert be raised meaning visiting the region was no longer possible.
Such a parametric volcano risk insurance product could also be useful to industries that have factories, or large operational hubs, near to a high-risk volcano, or even to municipalities and local authorities who may benefit from insurance cover to help pay for evacuations and the like.
The Nikkei news service said that the parametric insurance product will be sold by Sompo Japan Nipponkoa in units of five or more, largely to corporate customers. The insurer expects that as well as being applicable to those already operating in a region near a volcano, the parametric insurance could encourage greater investment in those regions as coverage will be available that previously was hard, or impossible, to find.
The report says that when the product launches it will carry a JPY 300,000 ($2,735) option fee and would guarantee a JPY 10 million payout should the JMA set a specific volcanoes alert level to 3 or above.
Japan and its insurers have a history of launching innovative parametric insurance covers, ranging from some of the first catastrophe bonds to feature parametric triggers, derivatives that paid out should the cherry blossom bloom be late, and a variety of other products.
Buyers of this volcanic risk insurance product will benefit from the parametric trigger as it means payouts can disbursed rapidly and clients will have complete certainty that they will receive capital should the alert level reach 3 or higher.
Of course, being a parametric trigger this is a risk that the ILS fund market and alternative providers of reinsurance capital would appreciate and be keen to access. However, until the product could scale out significantly, it’s unlikely an insurer of Sompo Japan’s size would need much reinsurance protection initially.