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Home >Markets >Stock Markets >World's first ever volcano bonds to cover 10 volcanoes. How they work

A bond sponsored by the Danish Red Cross is the first to offer dedicated insurance against volcanic eruptions, according to a statement.

The project’s partners aim to raise as much as $3 million with the launch of the note, which will transfer money to Denmark’s branch of the Red Cross. Initial investors include Schroder Investment Management and Plenum Investments, a firm specializing in insurance-linked securities, according to the statement.

The payout is based on a quantitative model that’s supposed to predict where funds will be needed based on the height of an ash cloud following a volcanic eruption and prevailing winds. The bond will cover 10 volcanoes, including Mexico’s Popocatepetl and Nevado del Ruiz in Colombia.

The project has been years in the making, with the partnership’s website saying “it all started around a table in Zurich" in November 2018.

Catastrophe bonds typically insure against damage from natural disasters like earthquakes and storms, with some already including volcanic eruptions in baskets of covered perils. They tend to offer high yields to investors who run the risk of losing some or all of their investment if a disaster happens.

The deal adds a new variant to a market that attracted mainstream attention last year with the World Bank’s pandemic bonds.

Sold in 2017, pandemic bonds came under criticism when they failed to pay out during an Ebola outbreak in 2019 and in the early months of the coronavirus pandemic last year. They eventually took losses due to the impact of Covid-19.

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