Severe space weather event could have huge effect on insurance industry: Lloyd’s

A severe space weather event that causes major disruption to the electricity network in North America could have major implications for the insurance industry, according to Lloyd’s.

In Solar Storm Risk to the North American Electric Grid, Lloyd’s reports that between 20-40 million Americans are at risk of an extended outage, with durations up to one to years, from a Carrington-level, extreme geomagnetic, storm.

“The knock-on effects of loss of electricity are very difficult to quantify, but given the fact that our society is increasingly dependent on electricity they are likely to be severe and wide-ranging,” according to the report. 

Insurers could be exposed to significant business interruption claims in the event that businesses, public services and households are without power for a sustained period of time. This would be more so as backups are likely to last for a limited period, the report cautions.

While a standard business interruption policy would require physical damage in order to trigger the policy, a major space event could damage transformers, which would lead to a physical damage trigger.

Even in a case of pure voltage collapse without equipment damage, the incapacity of the grid itself could be deemed ‘physical damage’, because it is unable to perform its essential function, the report notes.

Business interruption is likely to not be the only potential insurance exposure.

“A major space weather event could disrupt supply chains and this might trigger contingent business interruption covers – again there could be issues around physical damage triggers,” the report reads. “Major disruption to the power network is also likely to lead to wide scale cancellation of events (cultural, sporting and others) which could affect insurers offering this type of cover.

It is also conceivable that major power outages could result in liability claims if, say for example, employees’ safety was compromised or the public were put at risk. Furthermore, if companies and other organisations impacted by a space weather event were viewed as not taking appropriate preventative action, they could be susceptible to directors and officers’ claims.”

On the extreme end, a space weather event on the scale of the Carrington event could lead to a loss of power for weeks, if not longer. This would cause disruption in a number of areas, including transportation, clean water, food supplies and hospital services.

“The absence of such fundamental services could lead to major and widespread social unrest, riots and theft with ramifications for the insurance industry an society in general,” according to the report.

“It is also likely that financial markets (especially as the financial sector is generally concentrated in the areas most at risk ie. the northeast of the U.S.) could be significantly disrupted by a severe space weather event, which would have major global financial impacts, including on insurers in terms of their investment portfolios.”