Space weather threat underlines gaps in risk quantification, says WTW

By Rebecca Delaney

March 14 - (The Insurer) - With the current solar cycle scheduled to reach maximum activity in July this year, the latest Lloyd's systemic risk scenario on space weather risk is a timely reminder of the limited availability of non-damage business interruption covers for grey swan events of this nature.

A Lloyd's systemic risk scenario published this month found that the global economy could be exposed to potential losses of $2.4 trillion over a five-year period from the threat of hypothetical extreme space weather.

Economic losses ranged from $1.2 trillion in the least severe scenario to $9.1 trillion in the most extreme case, equivalent to a reduction in GDP of between 0.2% and 1.4%. The threat of solar storm accounted for an expected loss of $17 billion.

Previous events include a 1989 solar flare that caused an electricity blackout across Quebec and the 1859 Carrington Event, which was the most intense geomagnetic storm on record.

The Carrington Event caused sparking and disruption to telegraph systems. With modern infrastructure both more sensitive and interdependent, potential losses from the impact of solar activity on satellites would be primarily driven by damage to critical infrastructure, including energy grids and satellite networks, as well as disruption to power, navigation, communications and financial systems.

This combination of sectoral risks raises concern around the potentially systemic nature of NDBI.

However, Scott St George, head of weather and climate risks at WTW Research Network, told The Insurer that solar activity is rarely top of mind for insurers given that loss incidents are rare.

"This is one of those cases where the typical approach to quantifying risk doesn't really help, because we know it's rare," he said.

"We often rely on models and other tools to make numerical estimates of risk. We have to keep in mind that there are limits to our ability to represent these sorts of risks that fall in the category of rare things that we know have happened before and could possibly happen again."

St George said that encouraging (re)insurers to look at unconventional sources of information (such as eyewitness diaries or the chemistry of trees) will enable them to gain insights that may be missing from conventional numerical models.

Daniel Bannister, weather and climate risks research lead at WTW Research Network, added that since there is some level of predictability to sunspots and solar flares according to cycles of solar activity, they are regarded as grey swan events.

"There's no catastrophe models for these grey swan type events. I don't think we would necessarily advocate for catastrophe models that look at solar activity, just because it is so rare," said Bannister.

"The whole point really is about trying to explore the underlying conditions for risks for particular businesses that may be impacted by these types of events, like aerospace utilities."

Speaking at an event at the Lloyd's building earlier this month, Peter Laidlaw, active underwriter at Atrium Syndicate 609, outlined that the "knock-on" effects of space weather on power, utilities and communications are unlikely to be insured under an NDBI cover.

"Most insurance policies require a physical damage trigger to be activated in order to kick in. NDBI, for example, is not necessarily that common," said Laidlaw.

"Whether we talk about GPS or power, the whole world almost comes to a grinding halt without communications or the ability to trade. The whole infrastructure is so dependent now on these particular elements which are the most at risk. I'd love to say it’s covered, but the answer is that there are elements of coverage."

Laidlaw added that an education process is required at the risk management level for the insurance market to begin to consider taking on elements of space weather risk.

"We’re living in a very commercial world – if we can't charge a premium for it, we're not going to give it away when you're telling me it's going to cost $2.4 trillion," he said.

"There’s an education that society and businesses need, because I’m struggling to see the insurance sector really responding. There could be some collaborations down the line but, as it stands today, no insurer is going to sit there and add coverage for it without a premium. What's more, if exposed, it would actually be excluded because of the systemic nature."