The University of Cambridge Centre for Risk Studies has released a report exploring the potential impact space weather could have on the U.S. economy and insurance industry, noting that its stress test scenario shows the insurance industry could face losses of as much as $334 billion.
Much uncertainty surrounds the potential economic impacts an extreme space weather event could have on modern economies, leading the Cambridge Centre for Risk Studies to produce a stress test scenario (the Helios Solar Storm Scenario) that explores the impacts of a U.S.-wide power system collapse as a result of extreme space weather, such as solar storms and geomagnetic activity.
“This scenario describes how an extreme space weather event can cause direct damage and indirect debilitation of high voltage transmission grids in the USA, resulting in power blackouts along with consequential insurance claims and economic losses,” says the report, Helios Solar Storm Scenario.
The stress test includes three variations of the Helios Solar Storm Scenario, that differ in regards to damage distribution and restoration timeframes says the report, and which has the potential to result in an insurance industry loss of between $55 billion and a massive $333.7 billion.
To put the above figures into context, the report notes that the lower end of the loss estimate would still be roughly double the volume of insurance payouts from both superstorm Sandy and hurricane Katrina, and fairly close to the overall insured loss from global catastrophes in 2015.
A wide range of business lines could be affected by space weather events, says the report, highlighting a selection of potential loss areas. This includes, power transmission operators, power generation companies, companies that lose electricity, satellites, homeowners and specialty lines, such as event cancellation.
The report considers three scenario variants, S1, S2 and X1, with the former being considered the baseline scenario. “It involves limited damage to EHV transformers in the US, with only 5% of those units suffering any damage, and restoration periods of moderate length,” says the report.
S2 assumes increased damage levels but similar restoration times, while the X1 scenario is “deliberately extreme,” has similar damage levels to S2 but a longer restoration duration, explains the report.
So according to the report the potential impact to the U.S. insurance industry, and therefore reinsurance and also insurance-linked securities (ILS) marketplace is substantial, suggesting that a severe space weather event could quite easily become the largest insured loss event in history.
“There is increasing interest in understanding extreme space weather as an emerging risk in the insurance industry,” says the report.
Covered at the time by Artemis, reinsurance broker Aon Benfield published a report in 2013 highlighting the potential for large economic and insured losses from space weather events, underlining the potential development of products to protect against the peril.
There is a wealth of data and observations surrounding space weather events and solar activity, so it’s possible that some kind of indexed solution could be created that would trigger a payout based on certain levels of solar activity, something that would essentially be parametric by nature, as discussed by Artemis previously.
However, with much uncertainty surrounding the impacts of solar activity on the Earth and global insurance markets, it’s essential that insurance, reinsurance, and the wider risk transfer markets begin to assess the potential impacts a space weather event could have on their operations.
Furthermore, while the report fails to state any definitive economic or insured losses, analysis like this will improve the ability to protect against such events as the understanding among the industry grows.
Many insurance and reinsurance firms, for example, could find themselves greatly exposed to such a severe solar storm event, but find that their own protection is limited. Meanwhile examples from the weather risk management and parametric insurance sectors demonstrate that protection can be structured for these risks, with the questions on feasibility likely coming down to risk appetite and cost.
There’s clearly an opportunity for insurance, reinsurance, and ILS players to develop products that will protect against space weather events, but much like other uncertain and complex risks, such as cyber for example, the modeling and overall understanding of the potential impacts will likely need to improve before any adequate and affordable products can be developed.
The report emphasizes that this just a stress test and not a prediction.
“It does not predict when a catastrophe may unfold. Indeed, it does not also provide definitive economic and insurance loss estimates, as there is still widespread disagreement between different schools of thought. It does however provide insight into the range of exposure that may be experienced based on different expert opinions of extreme space weather events,” explains the report.