By Kyle Beatty and Nicole L. Homeier
"Never say never" is a well-known axiom that has found its way into song lyrics, book titles, and even a James Bond film, but it applies perhaps most dramatically to the potential for catastrophic weather events. Although infrequent, they do happen -- at times with devastating results.
Our society's reliance on the electrical grid means severe solar storms can wreak havoc on our economy -- including potential business interruption losses, damage to critical physical assets, and supply chain interruptions. Power outages from space weather fall into the category of "low frequency, high severity" events. A long-term outage would create untold economic losses and fits the profile of a market-changing catastrophe.
The most severe space weather event in recorded history -- known as the Carrington Event -- took place in 1859. The largest geomagnetic storm on record, it electrified transmission cables, set fires in telegraph offices, and produced Northern Lights so bright that people could read newspapers by the glow. If a similar storm occurred today, according to a report by the National Academy of Sciences, it could cause $1 trillion to $2 trillion in damages to society's high-tech infrastructure and require four to 10 years for complete recovery. By comparison, Hurricane Katrina caused "only" a fraction of that damage.
Quantifying the Risk from Severe Solar Storms
Just how frequent are these extreme storms? According to records of past events, the earth experienced one occurrence in the last 150 years. Therefore, one might conclude the yearly chance of occurrence is one in 150. Some estimates suggest there is a 12 percent chance for an extreme storm to occur within the next 10 years, according to space physicist Pete Riley, senior scientist at Predictive Science in San Diego, Calif., writing in Space Weather. But these estimates ignore the physical details of electric grid risk. As a result, Atmospheric and Environmental Research is currently working with several insurance carriers to establish a much more rigorous view on this.
Although our work is ongoing, we believe a Carrington-like event is not all that rare or even unlikely. 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 meant it didn't damage electronic systems here on Earth. We were lucky. On July 23, a CME with a nearly unprecedented speed of 3400 km/s blasted from the Sun, and no matter the magnetic field direction, this would have a powerful impact on Earth. Again, we were lucky, the sunspot was facing away from Earth.
One famous example of the grid effect from space weather occurred during the early morning hours of March 13, 1989. 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. A portion of the Hydro-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. 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 have resulted from to the storm. The outage was a chilling reminder of our reliance on electrical power -- and the vulnerability of our grid to geomagnetic storms.
One cause for heightened concern is that the average age of transformers is significantly higher now than it was in 1989, meaning that the damage would be greater from a repeat of this scale of event. Also, in the 23 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.
Strategies to Manage Risk
In some ways preparing for a space weather outage is similar to outages from other causes. Strategies risk managers can use to mitigate power outage include:
* backup generators for critical systems
* redundant and co-located software and data systems, especially for revenue, customer-facing, and customer service operations
* service interruption endorsements that cover utility outage
* alternate suppliers for critical components or services, if supply chain risks are not covered
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. In this scenario, 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.
Insurers should start to address this issue by quantifying their company's financial exposure to service interruption events. To date, the process has been challenging for space weather 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.
At the primary insurer level, mitigation strategies for long-term outages might include:
* 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.
* Implement loss control strategies, such as advising insureds to have preapproved business-continuity plans, including alternative locations for operations.
* Evaluate the adequacy of aggregate cover insurance currently in place.
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. Improved tools to quantify the risk open opportunities for carriers to provide new products or expanded coverages that previously were not feasible.
Beyond financial exposure, another challenge posed by power outages is communication. Insurers need to consider how their own internal operations will proceed during 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 part of the company's enterprise risk management plan.
When the next event strikes, companies that communicate proČactively will establish themselves as trustworthy leaders in the eyes of their customers, employees, the media and local government.
Insurers must remember that although the chance of a long-term space weather outage is modest, they cannot disregard it. When a long-term outage does occur, the cost will be staggering. In short, the lesson here may be to "never say never again."
Kyle Beatty is vice president of the Business Solutions Division and Nicole L. Homeier is a staff scientist in remote sensing at Atmospheric and Environmental Research, a member of the Verisk Analytics family of companies.
October 15, 2012
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