Aon Benfield has issued a warning over the potential ramifications of a severe space weather event, as solar and geomagnetic activity is predicted to peak in the coming 12 months.

Although the probability of an event occurring is low, solar activity roughly follows an 11-year cycle with the peak in solar activity expected to occur early this year.

Benfield's new report Geomagnetic Storms reviews the potential threat and risk management implications. it argues geomagnetic storms and extreme solar weather are a realistic threat to three critical areas of modern infrastructure:

Electrical power distribution: Massive ground currents resulting from geomagnetic storms can flow through electricity distribution networks, resulting in large scale blackouts and permanent damage to transformers.

Telecommunications: Enhanced X-ray and extreme ultraviolet solar radiation during a solar flare has implications for radio propagation and telecommunications systems, including blocking of global communications.

Global satellite navigation: Solar radiation trapped in belts around Earth interacts with satellites leading to orbit decay, static electrical discharges and disabling of GPS services with particular consequences for aviation in high latitudes.

Few attempts have been made to estimate the potential costs of space weather events. However, a 2004 report of the US National Academy of Sciences estimated the economic costs of a repeat of the 1921 event for the US alone at USD2 trillion for the first four years but with recovery taking up to ten years.

Insurance policies and reinsurance treaties are likely to contain the legal triggers for liability in the event of the catastrophic failure of electricity distribution, telecommunications or satellite navigation networks. However, these contracts are unlikely to have been drafted for specific extreme solar weather losses. Looking forward, risk managers and insurance brokers can utilise this threat to develop broad-based contingent business interruption and extra expense products that currently require a physical damage trigger.

Stephen Mildenhall, CEO of Aon Benfield Analytics, said: “Insurance and reinsurance industry awareness of geomagnetic storms has grown in recent times, but accurate assessment of risk still remains in its infancy for all but a few niche sectors. The report details five major geomagnetic events that have occurred over the last 150 years, highlighting the need for a better understanding the risk management, pricing and coverage implications of this very credible type of event. We also outline some of the critical insurance issues involved in responding to the risk of geomagnetic storms."

This latest report forms part of a new series for 2013 from Aon Benfield that explores “pear-shaped phenomena”. These are relatively low probability, high consequence events that pose substantial risks to industry and the economy. With careful research and communication, the insurance industry can be at the forefront of risk mitigation for pear-shaped phenomena.

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