Power Grid

On August 14, 2003, large portions of the Midwest and Northeast United States and Ontario, Canada, experienced an electric power blackout. The outage affected an area with an estimated 50 million people and 61,800 MW of electric load in the states of Ohio, Michigan, Pennsylvania, Massachusetts, Connecticut, New Jersey and the Canadian province of Ontario. The blackout began a few minutes after 4:00 pm Eastern Daylight Time and power was not restored for 4 days in some parts of the United States.

In United States, Anderson Economic Group estimates the likely total cost to be between USD 4.5bn and USD 8.2bn. This includes:

* USD 4.2bn in lost income to workers and investors;

* USD 15m to USD 100m in extra costs to government agencies (e.g. due to overtime and emergency service costs);

* USD 1bn to USD 2bn in costs to the affected utilities;

The power blackout risk is generally underestimated. Blackouts during the last ten years in Europe and Northern America have demonstrated an increasing likelihood of supra-regional and long-lasting blackouts including high economic losses. Due to the increasing interconnectedness in combination with rather old infrastructure we expect this risk to increase in both frequency and severity. Politics have to establish clear frameworks for the governance of power supply infrastructures. This is a necessary step to enhance resilience of power grids. The main responsible stakeholders who have to take care of a reliable power supply are public and private utilities as well as system/network operators. Insurance buyers have to be aware that they may suffer during a blackout non-covered losses which require pre-cautions against damages.

For the insurance industry this might trigger an increasing customer demand not only for power blackout risk solutions, but also for supply chain and non-physical business interruption risks in general. It presents a great challenge, however, to handle those intangible risks while also...