Solar storms pose significant risk to industry: Lloyd’s

If electricity networks are disrupted, insurers could be exposed to substantial business interruption claims

Severe space weather events that cause disruptions to electricity networks could have major implications for the insurance industry, states a new Lloyd’s report.

According to the report, geomagnetic storms–severe disturbances caused by solar storms in the upper layers of the atmosphere–are a serious threat to the reliability of electric power. These storms induce currents in long conductors on the Earth’s surface, such as power lines.

Read: Blackout Backup

These additional currents can overload electric grid systems to trigger voltage collapse, or worse, damage a significant number of expensive extra-high voltage transformers. The economic costs of such an event would be catastrophic, says Lloyds.

The Carrington Event, which took place on August 28 and September 2, 1859, is widely regarded as the most extreme space weather event on record. In 1859, there were two huge auroral events: one on 28 August and an even more widespread display on 2 September. While electricity was not widely used at that time, the storm reportedly induced sparks along telegraph wires – shocking operators and rendering the telegraph network inoperable on those two days in North America, Europe, and even parts of Australia and Asia.

The report found that the corridor between Washington D.C. and New York City is at the highest risk for power outages from damaged transformers. Other high-risk regions include the Midwest and the Gulf Coast states. Dynamic simulations of extreme geomagnetic storms suggest that the total human population at risk of extended outage from a Carrington-level storm ranges between 20- 40 million in the at-risk areas, with durations of 16 days up to one to two years. The duration of outages will depend largely on the availability of spare replacement transformers. If new transformers need to be ordered, the lead-time is likely to be a minimum of five months, states the report. The total economic cost for such a scenario is estimated at $0.6-2.6 trillion USD.

Read: Damage to power utilities from solar storms usually minimal 

The knock-on effects of loss of electricity are very difficult to quantify, but given the fact that our society is increasingly dependent on electricity, they are likely to be severe and wide-ranging.

Solar activity follows an 11-year cycle, with the most intense events occurring near the cycle peak. For the current Cycle 24, the geomagnetic storm risk is projected to peak in early 2015, states the report.

The report argues that, if businesses, public services and households are without power for sustained periods of time, insurers could be exposed to significant business interruption claims. Typically business interruption cover under standard property policies will require physical damage. However, in the event of a major space weather event, transformers could be damaged leading to a physical damage trigger.

A major space weather event could also disrupt supply chains and this might trigger contingent business interruption covers – again there could be issues around physical damage triggers. Major disruption to the power network is also likely to lead to wide scale cancellation of events (cultural, sporting and others), which could affect insurers offering this type of cover.

In the more extreme end of the spectrum, a major space weather event on the scale of the Carrington Event could lead to power loss for a period of weeks or more. This would cause major disruption to transport, food supplies, emergency and hospital services amongst other things.

The absence of such fundamental services could lead to major and widespread social unrest, riots and theft with ramifications for the insurance industry and society in general.

The insurance industry can play a key role in helping businesses and communities better understand the potential risks they face from solar storms and assist in mitigating these risks. In particular, some insurers are considering how to model the risks of geomagnetic storms on earth systems and apply expertise and learning from more traditional catastrophe modelling to the impacts of solar storms.

While the probability of an extreme storm occurring is relatively low at any given time, one will occur eventually. And as the electric infrastructure ages and we become more and more dependent on electricity, the risk of a catastrophic outage increases with each peak of the solar cycle.

To read the full report click here.

Follow us on Twitter at @citopbroker for more on business interruption 


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