Because of society's reliance on the electrical grid, space weather events — such as severe solar storms — can wreak havoc on the electric power supply and trigger losses from business interruption and damaged physical assets. Verisk Review recently spoke with Kyle Beatty, vice president of business solutions at Atmospheric and Environmental Research (AER), about the impact of space weather events, the financial consequences to insurers, and how insurers can manage and evaluate their exposure.
Verisk Review: What are the chances of space weather causing a long-term power outage?
Kyle Beatty: While power outages from space weather are low-frequency events, they have the potential to cause crippling long-term damage. In fact, the risk of grid power outages due to space weather fits the profile of a market-changing catastrophe such as Katrina, the 9/11 attack, or the Japanese earthquake and tsunami. All were unprecedented and believed to be highly unlikely — and yet they occurred.
The most severe space weather event in recorded history — known as the Carrington Event — took place in 1859. Intense solar flares accompanied by huge coronal mass ejections (CMEs) created the largest geomagnetic storms on record. Telegraph operators received electric shocks, and telegraph lines melted. Auroras were seen all over the globe. If an event of similar magnitude were to occur today, some estimates indicate it would take down more than half the power grid and damage so many transformers that the recovery would take years.
Verisk Review: Just how rare are such catastrophic events?
Beatty: According to records of past events, the earth experienced an occurrence in the last 150 years. Therefore, one could conclude that the yearly chance of occurrence is 1 in 150. But this estimate ignores the physical details. AER is currently working with several insurance carriers to establish a much more rigorous view on this. Although our work is ongoing, a Carrington-like event is not as rare as many companies think. Furthermore, it doesn't take a repeat of the 1859 event to cause catastrophic loss. In fact, severe space weather events have occurred much more recently. In March, the sun emitted the biggest solar flare in five years. Fortunately, the orientation of the solar storm's magnetic field didn't damage electronic systems here on Earth — we were lucky. Such an event gives a clear indication that there will be more in the future.
Verisk Review: Can you provide an example of a recent severe space weather event?
Beatty:: During the early morning hours of March 13, 1989, the Hydro-Quebec power grid was humming along smoothly while most grid customers slumbered. Suddenly, a portion of the Quebec power grid failed in a cascade fashion. Several key pieces of equipment sustained damage, including two transformers that had to be removed from service.
On the same day throughout North America and the United Kingdom, electrical disturbances barraged power grids for several hours. In New Jersey, a $12 million generation step-up transformer at the Salem nuclear plant suffered permanent insulation damage.
Verisk Review: What was the cause?
Beatty: A blast of magnetized plasma from the sun triggered a powerful geomagnetic storm. The storm spawned electric currents in the ground and in power lines — currents that rapidly incapacitated key power grid components. As a result, schools and many businesses closed for the day, and grid customers tried to stay warm at home. Luckily, within nine hours, power was restored to most customers in Quebec. The Salem nuclear plant was also fortunate; workers were able to install a spare transformer within a "short" six-month time frame.
Over the next two years, there were 12 transformer failures in North America suspected to be related to the storm. The outage was a chilling reminder of our reliance on electrical power — and the vulnerability of our grid to geomagnetic storms.
In the 22 years since the Quebec grid sustained damaged, global companies and regional economies have increased reliance on the electrical grid dramatically, meaning the impact today of a similar solar event could be even more drastic.
Verisk Review: What steps can insurers take to manage and evaluate their exposure?
Beatty: The first step is to quantify your company's financial exposure to service interruption events, including space weather events. To date, the process has been challenging because our industry's toolbox has largely been empty. AER scientists are now allowing risk managers to take a quantitative approach to evaluate the impact of both short-term and long-term power outages. In this context, short-term means hours or a day, with a recurrence interval of a few years.
Plans for power outage mitigation primarily rest with the insured. Those plans include having backup generators for critical systems, redundant and colocated software and data systems (especially for revenue, customer-facing, and customer service operations), and a service interruption endorsement that covers utility outage. Such measures are particularly critical for supply chain risks.
A long-term electrical outage caused by space weather could last for a week, a month, or even a year. There is no way to prevent an outage from striking your company; the risk lies in our power grid. In this instance, the financial exposure to the insurance industry escalates to an enterprise level. Losses can accumulate from multiple coverages and lines, and movements in the broad financial markets are likely.
Verisk Review: Can you recommend a specific mitigation strategy for long-term outages?
Beatty: One mitigation strategy is to carefully review your company's policy language and, if absent, consider deductibles, sublimits, and exclusions to manage the risk from coverages that are not well quantified. Further mitigate losses through loss control strategies, such as advising insureds to have preapproved business-continuity plans, including alternative locations for operations.
The risk of a space weather–related power outage, for example, is lower in certain places in the United States. A company with multiple locations could have a business-continuity plan that includes relocation of critical functions to a safer area when the duration of the outage is uncertain. Data access at new locations is one of many factors to consider. The tools AER is creating to quantify this risk will also create opportunities for new products or expanded coverage that was not previously possible.
Verisk Review: What other areas should insurers focus on?
Beatty: Beyond financial exposure, another aspect is communication. Insurers need to consider how their own internal operations will react to such an event. How will management communicate with each other, employees, partners, and customers? Corporate reputation — including a clear demonstration of risk readiness — should be considered within the company's enterprise risk management plan.
When the next event strikes, companies that communicate proactively will be viewed as trustworthy leaders by their customers, employees, the media, and local government. However, if organizations change their spokesperson or alter their plans every few days, they'll be perceived as unprepared. Public patience can dissolve when problems persist for days or months, as we've observed in events like Hurricane Katrina. Insurers must remember that although the chance of a long-term space weather outage is modest, it cannot be disregarded. When such an event does occur, the cost will be staggering.