Lloyd’s Report Highlights Solar Storm Threat as Emerging Risk

“A large solar storm could leave tens of millions of people in North America without electrical power for several months, if not years, potentially costing trillions of dollars,” according to Lloyd’s latest emerging risks report: “Solar Storm Risk to the North American Electric Grid.”

The report, which is being launched at the Electric Infrastructure Security Summit in London, was produced in co-operation with U.S.-based Atmospheric Environmental Research. It notes that while large geomagnetic storms are relatively rare, they “can create a massive surge of current, potentially overloading the electric grid system and damaging expensive, and critical, transformers.”

According to the report, a large solar storm in 1989 triggered the collapse of Quebec’s electrical power grid, leaving six million Canadians without power for nine hours. A smaller storm in 2003 caused blackouts in Sweden as well as damage to transformers in South Africa (transformers at that latitude were previously thought to be immune from such damage).

There have been even bigger and potentially more disruptive events in the past, and this sort could be repeated.

The report describes the Carrington Event of 1859, which is widely regarded as the most extreme space weather event on record. Such an event today would affect between 20-40 million people in the U.S. with power cuts lasting from several weeks to one to two years. The economic costs would be “catastrophic,” according to Lloyd’s – estimated at between $0.6 and $2.6 trillion.

Fortunately, Lloyd’s says, a Carrington-level extreme geomagnetic storm is rare, with historical records suggesting a return period of 50 years for Quebec-level storms, and 150 years for very extreme storms, such as the Carrington Event.

“However, far weaker storms still pose a significant risk. Ageing power infrastructure and increasing reliance on electricity make the world more vulnerable, especially at times of heightened solar activity – 2013 is a solar maximum, the peak of the sun’s eleven year cycle of activity,” the report says.

If such an event occurred it might cause damage to only a small number of transformers. However, if it were to happen in the densely populated U.S. Atlantic coast,” the Lloyd’s report says it would be of particular concern. “Physical and technological risk factors along the East Coast – such as magnetic latitude, distance to the coast and ground conductivity – make it a high risk for power outages, although the Midwest and the Gulf Coast states are also at risk,” the report warns.

Given the chaos a major power outage could bring, the power industry, policymakers and insurers need to evaluate preparatory and mitigation measures, the report says.

The warnings are being heeded. The Lloyd’s report indicates that governments are “waking up to the risk and taking the threat of geomagnetic storms seriously.” In April the White House Office of Science and Technology Policy released a report assessing U.S. capacity to monitor and forecast space weather, while the UK added space weather to its National Risk Register in 2012.

“Most space satellites that can provide warnings of incoming geomagnetic storms are past their mission lives and replacements will soon be needed,” according to the report. “Power infrastructure can also be hardened against geomagnetically induced currents in regions with the highest risk of outage. While these measures come at a cost, prevention is much more cost effective than paying for huge damages caused by a severe storm.”

Any fallout from a solar storm, particularly one that hits North America, would inevitably affect the insurance industry. It would cause sustained power outages, which could expose insurers to significant business interruption claims, “although exactly how cover for such an event would respond is uncertain, the report says.

Business interruption is likely to be only one aspect of potential insurance exposure. “A space weather event could disrupt supply chains, lead to wide scale cancellation of major events and conceivably result in liability claims if employee or public safety was compromised, or if directors failed to take necessary steps to limit damage,” the report says.

Lloyd’s warns that a major event would have wider implications for the insurance industry and society in general, potentially causing widespread disruption to infrastructure, social unrest and disruption to financial markets.

Extreme solar weather would also be a direct threat to power companies and their insurers, according to John Chambers, deputy active underwriter at Aegis London, a specialist insurer of power companies.

He said that insurers and risk managers have made “some progress” in identifying geographical areas and types of equipment that could be more susceptible to loss. However, the lack of recent claims has meant that the issue is lower down the agenda for insurers than perhaps it should be and has made it harder for risk managers to get the appropriate capex budgets for risk mitigation.

“Specialist power insurers should be looking at wordings and the use of sub-limits and stand-alone coverage, although they are open to engaging with other bodies to look at ways of improving resilience and managing risk,” Chambers said.

Neil Smith, manager of emerging risks and research at Lloyd’s, hopes the report will serve as a blueprint to help insurers and others consider how they might mitigate the risks of solar weather.

“Geomagnetic storms present a huge potential risk with important implications for both insurers and society,” he said. “Insurers need to evaluate the potential impact of geomagnetic storms on the market, as well as work with governments and energy companies on ways to mitigate the risk at a society level.”

Source: Lloyd’s of London