Global insurance broker Aon Benfield is encouraging brokers and risk managers to reconsider physical damage triggers and loss occurrence definitions in current business interruption policies in light of the “exotic” damages that might arise from geomagnetic storms and extreme solar weather.
The report warns that solar activity roughly follows an 11-year cycle, with the next peak of such activity expected in 2013-14.
Solar storms are a realistic threat to the world’s electrical power grids, telecommunications systems and global satellite navigation networks, the insurance broker warns. Related damage could potentially affect all classes of insurance business.
“Cumulative damage during successive space weather events leading to eventual [electronic grid] failure may prove especially problematic for the insurance industry,” according to the January 2013 Aon Benfield report, Geomagnetic storms.
“What risk managers and brokers can do is utilise this threat to develop broad-based contingent business interruption and extra expense products that currently require a physical damage trigger. In this way, the industry will be better prepared to deal with the ‘wild card’ catastrophes that will inevitably arise.”
The potential collapse of the electronic grid would have the potential to shut down power to areas as wide as thousands of kilometres, affecting heating, lighting, all major utilities, communications and transport, emergency services and retail trade.
Aon Benfield’s report says current insurance policies may be ill-equipped to handle the type of extensive damage to the power grid that geomagnetic storms could produce.
For example, the report notes the dependence of the majority of direct and contingent business interruption (BI) contracts on the loss of use of property due to physical damage. But as BI policies flourish, and as their definitions of loss occurrence broaden, a larger proportion of damage from catastrophic events will be made up of lost wages and revenue.
Damage from a solar event could put a serious strain on these policies, for which pricing may not be accurate. Insurers may not offer coverage for solar weather events, or they may not issue exclusions.
In terms of costs, a 1996-2005 sunspot cycle damaged around 15 satellites at a cost of about $2 billion. The report estimates a repeat of the 1859 space weather event could result in approximately $68 billion in damage for lost satellite transponder revenue and replacement of geosynchronous satellites.
The above costs do not factor in the potential damage arising from power grid failure, such as water and sanitation services failure, dramatic decline in emergency services, increased house fires, plant shutdowns, fuel and gas shortages, food spoilage, halted retail trade, and the disruption to the financial, farming, manufacturing and transportation industries.
