Iceland’s Grimsvötn volcano erupted on Saturday, May 21, generating an ash plume over Iceland and other parts of Europe, which has disrupted air traffic across the continent.

Effect on Air Traffic

The eruption has led to significant flight cancellations in the U.K. Norway, Iceland, and Germany. However, officials reported on May 25 that the ash cloud was expected to dissipate shortly, after the volcano ceased spewing ash. Airlines and airports are expected to return to normal operations soon. Transportation authorities, airlines, and other organizations continue to monitor the situation closely.

Risk Management Implications

To manage supply chains, Marsh recommends that organizations consider alternative routes to market in the event that goods cannot be moved to planned purchasers in a timely manner. Organizations should also make provisions for additional storage of excess products, collaborate with air cargo handlers to ensure availability of capacity, and review contractual obligations with suppliers and key metrics such as service level impacts between two parties (fill rates).

View a video on supply chain risk management featuring Gary Lynch of Marsh Risk Consulting.

Property and Supply Chain Insurance

If a business suffers a direct loss to its own assets, considerations of coverage are straightforward. However, if there is indirect interruption  related to the volcanic eruption, a business should review its property policies and relevant extensions and clauses to understand how they might  respond to the event. Such extensions and clauses include supplier extensions, customer policy extensions, and denial of access clauses, but  these usually only apply where damage has occurred.

While a volcano-related disruption would typically fall under a property policy's earthquake coverage — even if the policy has ingress-egress or  civil authority time element extensions — it requires that physical damage occurs which causes a lack of access to the insured's location. Policies  often have distance and time limitations defining where the damage must occur.

An available alternative to such traditional property policies is supply chain insurance, which provides coverage for both damage and nondamage  related incidents affecting a named supply and named supplier (of a product or service). The trigger to these policies is interruption to  production of service due to supply failure; the April 2010 Eyjafjallajökull eruption, for example, would have provided such a trigger. The basis  of cover is not full indemnity, as the loss calculations are used to establish loss of gross profit per day/working period; a fixed claim amount is  agreed up front. This insurance provides wider coverage in terms of events and more certainty of cover due to the pre-agreed claim levels.

Marsh will continue to monitor and advise on evolving conditions related to the Grimsvötn volcanic eruption.

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