“A solar storm that reaches earth induces in grounding cables and tubes electrical currents, which can damage or destroy high voltage transformers,” said Mr Bruch. This results in electrical short circuits. “Especially affected are high voltage lines and deep sea lines,” he added.

Only a week ago a large eruption emitted particles to earth. The National Oceanic and Atmospheric Administration (NOAA), a US source of warnings and alerts about space weather and its impacts on earth, ranked it as the strongest solar radiation storm since 2005.

The authority categorises geomagnetic storms on a scale from 1 (minor) to 5 (extreme).

In addition, other scientists predict the occurrence of solar storms in detail.

Germany’s national research centre for aeronautics and space, Deutsches Zentrum für Luft- und Raumfahrt (DLR), and the European Space Agency are working on special early warning systems.

Via telescope, they can observe space weather on a better and more regular basis and analyse its effects on the earth.

These are extremely rare events that the Allianz expert warns about.

A solar storm hits earth with full force only once in 500 years and would paralyse the power supply, statisticians believe. But then, the damage would be extreme.

The first time that scientists observed the phenomenon of solar storms was in England in 1859, when an extraordinary coronal mass ejection lead to a breakdown of the telegraph system.

In 1989, there was a blackout because of a solar storm in the Canadian province of Quebec.

Six million people were left without electricity and the economic loss was calculated at C$10m.  

Particularly susceptible are telecommunication satellites and satellites for the GPS navigation system, on which modern traffic systems, aviation and marine, depend.

Last week Delta Airlines had to change their route between Asia and the US because of a solar storm. Flights to Shanghai, Hong Kong and Seoul were rerouted to the south.

“The risk has a new dimension as space weather events could severely damage the power suppliers’ high-voltage transformers,” Mr Bruch said.

“These devices are extremely expensive and their repair can take days or weeks,” he added.

If several transformers are damaged, the worst-case scenario is an economic loss of billions of dollars.

But insurers generally only cover blackout losses if there is a direct physical loss or damage that triggers business interruption such as fire, Mr Bruch explained.

However, this is only a small element of potential losses. “Losses from the chain reaction are not covered.”

Even if the results of space weather are not that severe and solar storms do not reach the earth, the danger of business interruptions because of power grid risks is not averted, he said.

“Frequency fluctuation in the power grid can cause losses due to business interruptions in special production processes,” added Mr Bruch.

Companies cannot rely on the insurance industry, according to experts.

“Many insurers do not define short blackouts due to voltage fluctuations as electrical short circuits,” Georg Bräuchle of Marsh Management in Germany said.

“We argue constantly with the insurers about whether it is insured or not. At the same time we are in discussions with them about a solution,” he added.

Energy suppliers and network operators are especially affected by solar storms.

They can take some risk management actions to prepare, believes Allianz expert Mr Bruch.

They can invest in emergency power supply equipment such as back-up transformers or batteries to bridge a limited outage for a few days and prevent business interruption.

In addition, a core risk management measure is a properly managed business continuity plan that takes power blackouts into account.

“The existence of such a plan is also a prerequisite for making the risk of business interruption due to power blackout insurable at all. Covering non-damage business interruption is unknown territory for most insurers,” said Mr Bruch.

“But in response to these new risks, we work on individual solutions to support our international clients,” he continued.

These risk management measures are nothing new to broker Georg Bräuchle.[I’m assuming it’s Georg Brauchle from Marsh] “Energy providers already have alternative ways of generating electricity, because they are obliged by law to take certain precautionary measures,” he said.

“On the one hand, they have spare aggregates to be able to produce electricity in emergencies; on the other hand, they remain in close contact with one another and help each other in emergencies,” he said.

Companies which need a lot of electricity for production purposes have their own power stations.

Mr Bräuchle sees a much lesser risk than Mr Bruch for a blackout for German enterprises caused by a solar storm. “Such phenomena are almost non-existent for German industries, unlike in Scandinavian countries and Canada which have already been affected,” he said.

Even industrial insurance customers are very careful on this question.

Solar activity has increased again since 2010, said Klaus Greimel, insurance head of energy giant, Eon and current President of the DVS, the German risk managers’ association. However, he is not in a position to forecast the potential effects of such phenomena—other specialists would have to do it.

Hans-Jörg Schill, Managing Director of Airport Assekuranz Vermittlungs-GmbH is also reluctant to commit himself. “I am not in a position to judge such events,” he told CRE.

The German insurance industry is also much more worried about the supply of electricity for their production plants in general than they are about solar storms.

This follows the government’s decision in the summer of 2011 to end its dependency on nuclear power, said Mr Bräuchle. “Parts of the national grid are unstable, and before we can change over to wind and solar energy, these parts will have to be improved and reinforced,” he said.

Many companies are very worried about what the future will bring. They fear power cuts on a large scale when the offshore wind farms in the north of Germany start producing electricity full capacity and sending it down south to the rest of Germany.

Eon's Mr Greimel is also worried about this danger.

The high voltage grids in Germany have been designed for the continuous production and consumption of electricity.

“The system may become destabilised due to increased production of electricity from wind turbines in the north and the increased use in the south. There is a need for rapid and major investment in the national grid to maintain its stability,” pointed out the risk manager.

Eon experienced a power loss in November 2006 because of overloaded power grids.

A chain reaction led to millions of people being without electricity in Europe.

“And although the electricity supply resumed after a few minutes, it shows how serious the scenario can become,” Mr Greimel said.

Industrial companies react in very different ways to intermittent power cuts.

“There are some very delicate areas such as the production of semiconductors or certain production lines at motor manufacturers which can react very sensitively to power cuts and power variations. Damage is possible even after very brief power cuts. There are other areas which can compensate for a power cut of even two hours,” said Mr Greimel.

The aluminium industry is very susceptible to power cuts. “If longer power cuts happen, then I would have to employ miners to take out the remains out of the blast furnaces. The process begins after only a few hours,” Mr Greimel explained. Once aluminium has gone cold, it is difficult to make it molten again.

This is why many industrial companies which are fearful of power cuts have already taken precautionary measures by installing their own generators.

There is the possibility of taking insurance against power cuts, Mr Greimel said. “If I as a company can illustrate my individual risk situation very well, I will most likely be able to obtain cover for certain areas. The only question is how expensive the cover will be,” he said.

The risk of power blackouts and supply will be a key topic discussed at Commercial Risk Europe’s Risk Frontiers seminar in London on 15 February. Michael Bruch of AGCS, the sponsor for the event, will speak on the topic. He will be joined by Dr Pierre Noël, Political Economist at Cambridge University who has a special emphasis on natural gas. Since 2008 he has worked on gas supply security in Europe, focusing particularly on the situation and policies of the most Russia-dependent member states of the European Union. He also works on the changing dynamics of the European gas supply, the accelerating integration into the world LNG market and the restructuring of the EU-Russia gas relationship. The seminar is almost full to capacity with over 80 risk managers attending and almost 170 people in total. Any risk managers who would like to come along please contact Hugo Foster at HFoster@commercialriskeurope.com to see if we can fit you in.

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