Space weather risk rising, time to hedge with derivatives?

The sun last week sent out the strongest solar flare for the last four years and scientists warn that this is a sign of things to come as we head toward a period of increased sunspot and solar storm activity. The next solar maximum, as it is called, is expected in 2013. This is when the next peak in the current cycle of solar activity is expected to hit us.

Scientists are warning that we need to prepare for the possibility of a major solar storm or an extended period of active space weather which could cause a global catastrophe that in the worst case could lead to a $2 trillion ‘global Katrina’.

Sir John Beddington, the UK’s chief scientist said ‘We have to take the issue of space weather seriously, the sun is coming out of a quiet period, and our vulnerability has increased since the last solar maximum.’

In 1859 the earth experienced its most devastating space weather solar storm which destroyed much of the worlds telegraph networks. A similarly sized solar storm today could badly damage the whole worlds electronic communication and distribution systems.

As this risk is substantial, and getting greater as the world develops even more reliance on electronic communications and satellite powered location technologies such as GPS, now is the time to ensure there are risk transfer mechanisms available to those seeking to hedge these risks. Could space weather derivatives be created and traded on an exchange such as the CME? There’s certainly plenty of space weather data available to measure or trigger a hedge against. A loss of $2 trillion would devastate the reinsurance market and even with the capital markets help it would be difficult to cover. Perhaps it’s time to start taking space weather risks more seriously?