Both products and conversations with power utility clients are evolving to address new blackout risks
“The industry has much more awareness of these heightened threats,” says Ingman, the IESO’s manager of operational excellence.
So do insurers, who have renewed attention on blackout risks in recent months. A white paper prepared jointly by the CRO Forum (a group representing global insurer chief risk officers) and Allianz forecasts “an increasing likelihood of supra-regional blackouts with accompanying large economic losses” that will occur more frequently and with greater severity in coming years, while emphasizing the opportunity to create new forms of risk transfer. While standalone blackout coverage isn’t a reality yet, evolution in other products on key fronts—particularly cyber and weather—is keeping pace with blackout risk factors, and shifting coverage conversations.
The Cyber Conversation
The types of risks to the North American power grid haven’t changed dramatically since the 2003 blackout that hit the Northeastern US and Central Canada. Solar storms have struck in the past—with the 1989 event in Quebec a notable example—extreme weather is a constant, and cyber risk has been gaining attention for several years. But it is the “unknown” factors of these particular grid hazards that sets them apart, according to Michael Bruch, risk consultant at Allianz Global Corporate & Specialty.
While they’re considered “low frequency, high impact events,” if one becomes a reality, the extent of the damage will likely be unprecedented, he says. With a common power outage, “you can restore your system within one or two days,” he explains. “But when you take scenarios like the solar storm or space weather or cyber risk, this is a new risk…. the damage could be much higher, and to restore [the grid] could take weeks.”
Incidents like the discovery of cyber-spying on the US grid in 2009 and the Stuxnet virus infiltration of Iran have made power providers and distributors more alert to hacking hazards. A crucial element of cyber risk stems from the potential for “common failure” across the industry, notes Ingman. By exploiting even a small vulnerability shared by many providers, “someone could probably take down a lot of things with a single piece of code.”
Evolving coverage for cyber risks are addressing the new targets for cyber crimes. Initially focused on hacking that threatened credit card numbers and client data, today’s cyber risk products have a broader scope, says Mike Petersen, managing director at Marsh Canada.
As more participants enter the market, “you get creativity,” he says. “Underwriters are willing to tailor the wording to fit the risks.”
The growing capacity in the market—which Petersen estimates at over $250 million in Canada—means more innovative coverage. Newer cyber products don’t reflect blackout specifically, but do address the fallout of a cyber-hacked power facility, with products that address reputational risk, endorsements that reflect specific risks, and tailored wording that address gaps in business interruption and property policies.
Other options for power clients include policies and programs with amendments to commercial general liability (CGL), he adds. “It would depend on the wording. The majority of insurance placements for cyber risks are done on a standalone E&O or as a component to an existing E&O policy.”
Watching the Sky
Creativity could also come into play on the solar storm front. The storms, which disturb the earth’s geomagnetic field, can damage electrical grids if geomagnetic induced currents (GIC) saturate transmission equipment. A 2010 Lloyd’s briefing on space weather acknowledges “a business opportunity to extend insurance to cover space weather threats to assets and services based on Earth.” While specific coverage for solar storms or so-called space weather is uncharted territory at present, “we are seeing a lot more of interest in better understanding of this risk,” says Ashutosh Riswadkar, product liability director at Zurich.
He foresees activity on the D&O and E&O front. “If the utility fails to take measures on a [solar] event, there may be litigation against them for failure to take proper action, to take protective measures or procedures.” Hypothetically, there’s also potential for litigation if a utility is contractually obligated to provide power, or a power customer loses a large amount of stock due to a solar storm-related blackout, he says.
Any future for solar storm-related damage would depend on the contract wording, and the exclusions. “If you have a transformer fire, there may be some coverage issues. It will depend on coverage terms.”
In any case, if a solar storm did strike a grid, “insurance is not going to be sufficient,” he says, pointing to preventive and protective measures as the best insurance at present. That would include surveillance and what he calls “system hardening,” which selects and protects high value transformers, and shoring up operational resilience by sharing power loads.
“This is a mega risk,” he says. “It cannot be ignored, so no action is not an option.”
Power providers and distributors are acting when it comes to extreme weather risks. The threat of extremes—such as a heat wave that can lead to a lack of cooling water for nuclear power plants, necessitating production slowdowns, snow or ice storms and their potential impact on distribution networks, and even extremes, like no wind for wind farms—are pushing an evolution in weather risk solutions that is similar to the one seen on the cyber risk front.
With more volatile weather and growing awareness of weather risk solutions, “more people are availing themselves of weather risk protection strategies,” says Karsten Berlage, managing director at Allianz Risk Transfer in New York.
Several trends have emerged as power industry players seek coverage. Power clients have become more involved in determining what they need. “In the past, they might have come to us and said, ‘can you help us?’ Now, it’s ‘this is what we need,’” he says. “There’s increased knowledge on the customer side, and energy companies are much more actively managing those risks where they might have [previously] been in a passive state.”
Trigger-based weather solutions have also become more sophisticated. “Increasingly we see deals with second triggers, not just the peril, but a price or commodity trigger,” he says. “ They’re not interested in the snowfall, but the impact that it would have on the bottom line.”
Add-ons are also more common with power clients; with weather solutions coming packaged with equipment or business interruption add-ons that link to traditional weather triggers. “The weather is, to some extent, business interruption,” says Berlage. “[Especially] if you have a hydro plant you have to shut off.”
The need for weather protection is so great for larger energy clients that many are splitting deals, he adds. Risks and demand may have increased, but the group of providers hasn’t, which poses another challenge: “Either the pricing has to change or people will lose the appetite of taking on that type of exposure.”
A Broader Conversation
Changes in insurer-client conversations on blackout-related risks go beyond coverage. Marsh’s Petersen echoes Berlage’s experience about more risk-aware clients. “Three and four years ago we were making presentations to prospects on cyber risk, and now, power companies have moved through that step [themselves],” he says.
Business continuity is a crucial part of the conversation, with hydro clients mapping out crisis management plans, assessing supply chain or critical technology needs, adds Gayle Mitcham, vice president and national practice leader at Marsh Canada. “When we’re talking about cyber security, solar flares or terrorism, even a fire in the building could cause a break in service.”
Still, both clients and brokers acknowledge some conversational challenges. While the power sector acknowledges the threat of newer hazards, there’s often room for more information, such as specific rather than general warnings of cyber threats to the grid from government agencies, notes Ingman.
There’s also the risk of too much talking, and too little action on the part of clients and insurers, notes Riswandkar. “The dialogue has started, but it has to go beyond that. The greatest danger is ‘analysis paralysis,’ ” he says. “Just because it hasn’t happened in last five years, doesn’t mean it won’t happen in next five years. [We] have to use the body of knowledge we have, start thinking of small steps toward preparedness.”
While both sides are taking their own steps, they share a common awareness, says Ingman: “that what they thought was impossible before is not.”
Girding the Grid
How are Canada’s power sector players preparing for potential new blackout threats? Many have learned key lessons from blackouts in 1989 and 2003, notes Marilyn Yeates, property underwriter at Zurich Canada. “Hydro Quebec was all on one grid, and now they’ve learned some lessons, and they can shut down parts so it’s not so interconnected.”
At Hydro One, awareness and preparedness for solar storms is at an all time high, says Tiziana Baccega Rosa, the company’s spokesperson. Its preparedness plan includes updated software to calculate the distribution of GIC in the network in real-time, and installation of dissolved gas analysis (DGA) monitors to improve visibility of geomagnetic currents. “We are prepared for this situation and are confident in our ability to manage our system through this period as we have through other periods of solar activity,” she says.
Copyright 2012 Rogers Publishing Ltd. This article first appeared in the June 2012 edition of Canadian Insurance Top Broker magazine.