Solar activity predicted to peak in early 2015 may releasepowerful geomagnetic energy that can disrupt electric grids,causing widespread blackouts and disrupting markets, says Lloyd'sof London.

“One of the reasons that we are interested in activity on thesun in 2015 is that it has the potential to cause more damage nowdue to our increasingly complex electric systems and rapidly risingdependence on electricity,” Neal Smith, emerging risks and researchmanager at Lloyd's, tells PC360.

The insurance implications would start with contingent businessinterruption (CBI) claims, says Lloyd's in its report. Althoughstandard CBI policies usually require evidence of physical damageto equipment, it might apply if transformers were to explode because of space weather.

Furthermore, power disruption could lead to the cancellation ofthe services the public has come to depend upon for transportationand entertainment, such as flights and arena events, which couldlead to liability claims if people were put at risk. If customersbelieve companies did not take enough protective measures during ablackout, D&O claims could follow.

Geomagnetic storms–disturbances of our planet's magnetic fieldmingling with cyclic sunspot activity in the upper layers of theatmosphere–have overloaded power grids in the past and damagedexpensive and difficult-to-replace transformers.

Sunspots are known to wax and wane every nine to 14 years, andmajor activity flares every 150 years. The most massive solar stormknown to man occurred in 1859, which Lloyd's says means that Earthmay be overdue for another tanning session. According to ScientificAmerican, the 1859 storm created aurorae around the world so strongthat people in the Northern U.S. could read by its light- althoughtelegraph systems all over Europe and North America failed.

“Unfortunately for us, the Northern regions of the Americas andEurope are most susceptible to geomagnetic energy. The developedNorth American grid is also older, so it could be susceptible tothese storms,” says Smith.

In March 1989, the strongest geomagnetic storm ever measuredcollapsed the Canadian Hydro-Quebec power grid in two minutes. As aresult, more than six million people lost electric power for ninehours. The blackout's economic cost weighed in at about USD$12.7billion.

In 2003, solar flares caused a four-day grid disturbance andblackout in the northeast U.S. and eastern Canada. A group ofsupermarkets suffered food spoilage and lost business as aresult. The supermarkets paid $5.5 million in premium for theirinsurer, Liberty, to pay for the losses; however, Liberty deniedcoverage because its policy only applied to physical damage tooff-premises electrical plants and equipment.

Because the policy didn't define “physical damage”, the trialcourt ruled in favor of Liberty's argument that it was the grid'ssafety feature that shut down the generators and transmissionequipment when hit by the storm, instead of malfunctions. However,that ruling could be overturned if a transformer is damaged becauseof an ageing power system.

Smith says, “The aim of the report, as with many rising risks,is to hopefully raise awareness among governments and energycompanies to act now to study the defenses of the electricalsystem, rather than wait for a huge storm to occur. Mitigation is abetter strategy [than paying for damage later].”

Factors like a city's geomagnetic latitude, ground conductivityand distance from the coast's highly conducive seawater can makecertain regions more susceptible to geomagnetic storms than other.Unfortunately, that places much of North America, like New York andWashington, D.C., along the invisible lines that attract the sun'selectric energy.

Well-planned infrastructure, though, such as the connection oftransmission lines, transformer construction and the presence ofcapacitors designed to block the flow of magnetically-inducedcurrents act as a modern sunscreen against solar activity.