Solar storms result from explosions on the surface of the Sun. They may cause disruptions to a wide range of activities and devices, including radio communications, GPS, radar systems, satellites, electronics, railway signalling systems and pipelines. In this extract from The Geneva Association’s Risk Management newsletter, Mr Romain Launay of SCOR says despite the awareness of these potential damages, very few insurance policies currently mention solar storms. He advises what this means for (re)insurers.
When a solar storm hits the Earth, electricity transmission lines whose extremities are grounded to the earth provide a shortcut between points with very different electric potentials. This drives currents called geomagnetically induced currents (GICs).
Solar storms and their impacts on power grids
GICs may damage grid transformers in the bulk power system (BPS), because these transformers are designed to deal with AC currents, not DC currents. Moreover, even before GICs damage any transformer, they may increase their reactive power consumption and cause a voltage collapse. Furthermore, harmonic currents may cause the tripping of protective systems on the grid. This can also cascade into the collapse of parts of or even the whole grid.
Transformers are not easily repaired or replaced
Studies have diverged as to what would be the impact on modern power grids. Some of them foresee only rather limited disruptions. But other studies anticipate a major power blackout affecting millions of people for several weeks or more, with consequences reaching trillions of dollars.
The reason power blackouts caused by solar storms, if triggered by the destruction of transformers (as opposed to being triggered by the tripping of protective equipment) may last for an extended period of time is that damaged transformers could neither easily be repaired in situ or replaced by new ones. Indeed, it takes several months to build a transformer, manufacturing capacities are limited to around 70 units per year and spare inventories are low.
What consequences for (re)insurers?
In spite of the economic costs anticipated by some studies, very few insurance policies currently mention solar storms.
Consequently:
• Solar storms would arguably be covered by “all risks” policies, given the absence of any exclusion clause.
• Solar storms would arguably not be covered by “named perils” policies, given the absence of any inclusion clause, unless they indirectly provoke one of the perils named in the contract (fire, explosions, etc).
Given this, the remainder of this article attempts to review potential impacts from solar storms on various types of insurance policies.
Property insurance
Property insurance policies may be triggered by a major solar storm. In that case they may cover:
• physical damage incurred by the insured,
• business interruption caused by such damage,
• business interruption caused by physical damage incurred by a supplier/service provider/client.
In all cases, someone needs to incur physical damage for the policies to be activated. In this respect, it is interesting to keep in mind that a major blackout could happen without being caused by property damage to the grid: the loss of reactive power or the tripping of protective equipment may result in a partial or full collapse before transformers suffer from overheating.
Physical damage incurred by the insured
Generating companies/transmission system operators
A major solar storm could damage transformers up to the point of failure, if the grid does not collapse before. The destruction of a transformer would be indemnified by the property cover of the owner: the generating company or transmission system operators (TSOs).
Large corporate clients
A power outage, especially if prolonged, may cause physical damage to large corporate clients. Property insurance policies would typically cover such damage.
Retail consumers
Due to a power blackout, retail electricity consumers may suffer from various kinds of physical damage: loss of food in freezers, frozen water pipes, etc. Traditional property covers may cover some of this damage.
Business interruption
If the insured suffered both physical damage and a loss of revenue due to this physical damage, this loss of revenue would fall under the “business interruption” (BI) extension of its property cover.
Generating companies
If a generating unit resulted being cut off from the grid for a period longer than the waiting period stipulated by its insurance policy, the amount of the claim would correspond to the net loss of revenue of the generating company. This amount would partially depend on the spot price of electricity during the period when the power plant would not be able to operate.
TSOs
Similarly, TSOs not being able to transport power to end customers (large corporate or retail) because of physical damage to their own property could claim loss of revenue. Contrary to generating companies, they would typically be paid a fixed sum for each MWh they transport.
Large corporate clients
Physical damage directly suffered by large corporate electricity consumers (such as aluminium producers) may halt production for a certain period of time. If this period is longer than the waiting period stipulated by the insurance policy, BI covers could be triggered.
Service interruption/Contingent business interruption
In a severe solar storm-induced blackout scenario, many companies relying upon electricity for their operations would suffer from disruptions and loss of revenues, even if they do not incur physical damage themselves.
In most cases, these losses of revenues would be eligible for coverage under “service interruption” extensions of property covers, which are also widespread, not to say systematic, for large corporate insureds in developed countries.
Insurance policy wording
Since the awareness about solar storms remains limited among risk managers, brokers, insurers and reinsurers, policy wording does not take this risk into account. This is a real source of uncertainty as to the triggering or not of insurance policies, all the more so since court decisions may bring their lot of surprises.
Notion of physical damage
As stated above, the triggering of property covers, including BI/service interruption/CBI extensions, requires physical damage to be incurred (as far as service interruption and CBI extensions are concerned, this damage would not be incurred by the insured itself).
But an imprecise wording may cause the insurer to pay claims even if there is no such “physical damage”.
Notion of electricity supplier
The simultaneous triggering of the service interruption extensions of commercial/industrial clients dependent upon electricity in a region affected by a prolonged blackout is one of the highest risks for insurers.
Hence the importance of the wording of these extensions. In particular, wordings may raise the question of whether generating companies and TSOs would all be considered by a court as “suppliers” of electricity.
Liability insurance
A major solar storm could result in the impossibility for certain parties to perform their contractual obligations towards other parties, or even in damage caused by certain parties to other parties. For instance, a TSO may not be able to fulfil its contractual obligation to transport electricity.
This raises the question of whether such parties would be held liable and their liability covers would be triggered.
At first glance, one could argue that a major solar storm would fall under the exception of force majeure. However, it does not seem possible to sweep aside any liability risk altogether.
Plaintiffs may try to show that the risks posed by solar storms to power grids were well known and that mitigation measures were available, with a cost–benefit ratio that would, in retrospect, look compelling.
Unclear if new FERC rule change will affect companies outside US
Until recently, it seems that no binding standard or regulation applicable to power grid operators specifically addressed the risks from solar storms. But the new FERC rule changes this situation (see Box): when the reliability standards are defined, failure by US operators to comply will most certainly lead to liability in case of the occurrence of a superstorm with heavy consequences.
It is not clear whether such liability would extend to operators from outside the US. Although they would not be legally bound by these standards, they may be considered negligent for not having implemented them.
If generating companies or TSOs were held liable for a blackout, their liability covers could be triggered. However losses for (re)insurers would be limited by two factors.
1. First, contrary to electricity consumers, the number of generating companies and TSOs in a given area is relatively small. Even if they were all held liable, losses shouldered by their (re)insurers would be capped by the limit per cover times the (small) number of insurance policies concerned.
2. Second, liability insurance policies for generating companies and TSOs usually only cover liability arising from bodily injury, personal injury and property damage.
Consequently, these policies would not cover business interruption losses suffered by industrial electricity consumers merely due to their inability to operate without electricity. They would only be triggered if the industrial electricity consumers suffered physical damage.
Wider impacts in the event of a prolonged blackout scenario
If a solar storm were to cause a prolonged blackout, indirect impacts would cause severe losses on top of direct losses. For instance, disruptions suffered by firefighting units (lack of fuel, lack of water) may reduce their capabilities, which may result in more destructive fires. After days or weeks of power outage, distressed populations may resort
to looting.
For insurers, losses on the P&C liability side may be compounded by losses on the asset side. For instance, a prolonged blackout affecting the north-eastern part of the United States would certainly affect stock markets. The insurance industry, which holds investments worth trillions of dollars, would be affected.
These wider impacts show that solar storms should not be the concern only of (re)insurers’ underwriting power, BI or CBI/service interruption policies. The industry as a whole should engage with governments, power grid regulators, power generating companies and TSOs in order to raise awareness and promote concrete answers.
Mr Romain Launay is General Secretary of SCOR.
This article summarises a SCOR paper published by the author in February 2014. Texts appearing in this article are the responsibility of its author alone.