December 9th, 2013

Space (Re)insurance Solutions: Weather Risk

Posted at 1:00 AM ET

Space weather risks are difficult to quantify due to the lack of understanding and clarity about the likely duration and consequences of extreme events. However, it is clear the interconnected global economy that exists today is vulnerable to the risks posed by space weather. Indeed, extreme solar weather events have the potential to create systemic risk by triggering cascading failures across industries and regions.

A repeat of the Carrington event would likely devastate the global economy and the impact on the insurance and reinsurance sector would likely be huge. While property damage and business interruption insurance policies typically require physical damage, this could be triggered in the event of transformer damage.

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 cuts. 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. For example, the aging and interconnected nature of electrical grids is currently an area of significant vulnerability. Continued investment and improvements in such infrastructure is therefore crucial to mitigate the risk and costs.

In addition, acquiring a better understanding of space weather and designing early warning systems is key to mitigating the risk. Although the current level of understanding is limited to events that have occurred in the recent past, improved space weather forecasts and modeling of GIC impacts are essential to implement protective measures before the impact is 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.

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