On Monday, February 24, 2014, the sun once again provided a reminder of the potential hazards of solar weather events. A large solar flare was reported by the National Aeronautics and Space Administration (NASA) measuring at X4.9 (1) (or according to the National Weather Service's Space Prediction Center, an R3 (strong) Solar Flare Radio Blackout) (2) that could cause severe disruption to satellites and technology on Earth.
While the solar storm's path was directed away from the Earth, it was further evidence of the potential exposures businesses and insurers face if the trajectory of a major solar eruption was aimed directly at Earth. Guy Carpenter published a report, Tomorrow Never Knows, in September 2013 highlighting the effects of such space weather occurrences and their ramifications for our technologically dependent culture.
"Space weather" refers to the variable conditions on the surface of the sun that can influence the performance of technology on Earth. Sudden bursts of plasma and magnetic field structures from the sun's atmosphere (called coronal mass ejections [CME]), together with solar flares, can cause disturbances that are capable of impacting satellites and technology on Earth's surface in a matter of hours or days.
Major solar disruptions can affect the supply of electricity, cause satellite damage, and trigger global positioning system (GPS) signal disturbance. Severe CME events are also capable of crippling critical infrastructure, including transportation and fuel supplies. An extreme event, if it were to occur today, could result in long-term blackouts across vast regions, wreaking havoc upon society and national economies and costing billions or trillions of dollars in losses. The impact on the (re)insurance sector would also likely be profound, affecting several lines of business.
Historically, the most extreme solar incident on record occurred in 1859; the Carrington event, named after Richard Carrington, the astronomer who observed the flare. While electrical use was limited at the time, several telegraph lines around the world were overloaded (in North America particularly), triggering fires and ultimately causing a breakdown in service. More recently, two geomagnetic storms, one in 1989 and the second in 2003, affected the electrical power grid in some regions of the Northern Hemisphere, damaging transformers and causing mass blackouts affecting thousands. The 2003 storm permanently damaged a Japanese satellite valued at USD600 million.(3)
A Carrington type solar storm in today's technological and interconnected world would be devastating. A joint study by Lloyd's of London and Atmospheric and Environmental Research, titled Solar Storm Risk to the North American Electric Grid (4), estimates such an experience would cut power to up to 40 million people along the Eastern U.S. seaboard between Washington and New York City. According to the study, power outages would last 16 days to two years and the economic costs would be between USD600 billion and USD2 trillion for the region alone. The fallout could also be felt elsewhere, including parts of Europe. In addition, estimates indicate a repeat of the Carrington event would likely trigger a number of satellite anomalies and cause losses of up to USD30 billion for satellite operators.
The fall-out from an extreme solar storm would likely decimate the global economy and the impact on the (re)insurance sector would likely be huge. While property damage and business interruption insurance policies typically require physical damage, this could be triggered if a transformer is damaged.
Depending on how cover responds to such a scenario, several lines of business could be affected, including property, liability, credit, marine, space, and aviation cover, while business interruption/contingent business interruption claims would also be significant due to extended power outages. Carriers could also be hit by cumulative losses during a milder disturbance.
Recognizing such vulnerabilities enables global (re)insurers to raise risk awareness. Indeed, carriers have a vested interest in promoting risk mitigation and encouraging improved technological and safety advancements. Acquiring a better understanding of Space weather and designing early warning systems are key factors for mitigating the risk of an extreme solar event. Although the current level of understanding is limited to incidents that have occurred in the recent past, improved Space weather forecasts and modeling of geomagnetically induced current impacts are essential to implement protective measures before the repercussions are felt on Earth. (Re)insurers must also fully utilize their risk management expertise to adequately price and insure risks exposed to the extremes of Space weather.
Notes
1. NASA Solar Dynamics Observatory Website, February 25, 2014
2. National Weather Service, Space Weather Prediction Center Website, February 25, 2014
3. NASA Science News Website, A Super Solar Flare and GC Capital Ideas, December 3, 2013, Solar Weather: Historical Events
4. Lloyd's Website - Emerging Risk Report: Solar Storm Risk to the North American Electric Grid