Light in the dark

CRO Forum paper examines the challenges posed by power blackouts

For you and I, power blackouts can ruin our supply of frozen groceries, plunge us into darkness, cut off access to the internet and make things generally miserable and inconvenient at home. This is bad enough. But on a macroeconomic level - and over a long period - electricity outages can cripple a region’s business activities, disrupt public services and even threaten the viability of the whole economy. And the sobering thought is that given the growing interconnectedness of electricity grids combined with ageing infrastructure, these events are likely to increase in frequency and severity. Insurers, governments and the electricity supply industry need to address this challenge as a matter of some urgency.

This is the core message of the CRO Forum’s Position Paper, entitled Power Blackout Risks. Authored by Swiss Re's Martin Weymann and Michael Kuhn in company with other experts from Allianz and Munich Re, the publication emphasises that provided risk management is thorough and risks reliably quantified, insurance solutions have a key role to play in softening the economic impact of power outages.

The report points out that two essential pre-conditions for boosting the resilience of power supply infrastructures are improved governance and more attractive incentives to invest in the generation and transmission of electricity.

Up to now, insurance coverage of business interruption losses in the wake of power blackouts has only extended to physical damage to an insured’s assets. But only 20% to 25% of business interruptions, such as supply chain disruptions are related to a physical loss. Consequently, the authors say, insured entities could be confronted with very substantial uninsured losses should a prolonged power outage occur. In their view, this could generate an upturn in demand not only for new risk transfer solutions but also for supply chain and non-physical business interruption risks in general.

Published 12 December 2011

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