It's that time of year again when sizzling summer heat drives people to their air conditioners overloading electric supply, while tempestuous Mother Nature periodically lashes out at power lines and transformers.
All of which can disrupt business operations and leave risk managers in the dark about what to do.
That's because "the topic is not really within the scope of the risk managers oftentimes. ... When you don't often see blackouts, you are not really familiar with what can happen during that time," said Michael Bruch, Munich-based head of research and development at Allianz Global Corporate and Specialty.
Last year, of course, the big news was the major power outage in Japan following earthquake, tsunami and nuclear reactor damage. But it's really those fairly frequent, low-key outages that can torment most organizations.
In July and August, 2011, for example, more than 2.1 million U.S. electric customers lost 540 hours of power, according to the U.S. Energy Information Administration. Some outages lasted an hour or two; some lasted days.
Blackouts are typically caused by a "combination of several deficiencies" -- all beginning with high power demand or utilization, high power-plant utilization and defects due to aging material -- according to "Power Blackout Risks: Risk Management Options," which was part of the emerging risks initiative of the Chief Risk Officer Forum and was written by Bruch, Gerhard Schmid of Munich Re and Michael Kuhn and Martin Weymann of Swiss Re.
In the United States, the risk is highest along the East Coast -- because of its aging infrastructure, Bruch said.
For risk managers, the obvious recommendation is to have an emergency generator or some type of uninterrupted power supply on hand, said Duncan Ellis, U.S. Property Practice Leader for Marsh Inc., in New York.
Contingency plans should also include back-up work locations as well as "wind down procedures" for factories. That can prevent damage to equipment or products that are sensitive to heat or cold, and could be damaged by the power loss, Ellis said.
As for insurance coverage, Bruch said, "the trickiest thing with a blackout, oftentimes, is there is no physical damage" due to power grid designs. Because of that, "most of the losses linked to blackout business interruption are not covered within standard BI coverage," he said.
Check the wording of such policies, however, Ellis said, to ensure there is no mileage limitation between the facility and the power plant, and make sure it includes "transmission and distribution lines," so the business will be covered if ice storms, for example, bring down miles of power lines.
It's also important, Ellis said, that service-interruption insurance include all perils.
July 24, 2012
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