Are you ready for free electricity?

Europe is massively investing in Renewable energy production. Detractors of these technologies have a lot of compelling arguments and one of the most relevant is the energy availability: What if there is an instant surge in demand? What if everyone in England starts their kettle at half-time during the Euro’s final and there is no wind and no sun energy available?

Adjustment of energy production and consumption

This problem is not a small one. Failure in system capacity caused the 2019 blackout in England. A lightning event at a major production site and successive failure to maintain the grid frequency between 49.5Hz to 48.8Hz, as the system needed more than 2,100MW replacement capacity and only 1,000MW was available, caused a partial shutdown of the grid. More than 1 Million users lost electricity for 45 minutes. Indirect damage lasted over two days as train were still suffering from delays 48 hours later. Part of the incident was blamed on the Electricity System Response.

This event paved the way to a complete reshuffling of the energy production properties and technical requirements and new energy production tenders in the UK. One of the most important improvement required was that the speed of response must be faster than 0,5s from electricity request to input in the grid. Obviously, with no control over wind and sun, how can renewable energy producers face such challenges?

The role of energy storage

The solution resides in energy storage technologies. The most common are the battery storage facilities but there are many different options already in use that can be divided in three groups: electrical, electrochemical and mechanical.

Source: DNV GL AS (Safety, operation and performance of grid connected energy storage systems, October 2017, DNV GL AS)

Each of these types of storage represents new challenges, new technologies, unknown risks and a very steep learning curve – for the insurance sector. Clearly, pumped hydro and room temperature battery represents intrinsically distinct risks requiring unique risk management strategies. Massive capital will be deployed in these technologies in the coming years, as the Green Deal will accelerate renewable energy production development and accentuate their main problem of energy availability.

The new Super Power paradigm

In order to tackle this problem, the grid’s reserves must be equal to 3 days of consumption. With that in mind, we can already foresee an incredible energy paradigm shift materializing: Super Power. This revolution in our energy capacity will translate into more energy production than can be used and consequently, free energy at moments when energy storage is at full capacity and that there is more energy produced than consumed, as shown in the image below.

Source: RethinkX

This could lead heavy electricity consumers to maximize their energy needs according to these periods and develop new real time production processes that will allow to lower their operation costs. Cryptocurrency mining could feed exclusively on the excess energy production.

The paradigm change will materialize as “maximizing rather than minimizing energy use, because it is not harmful to utilize electricity generated from sunshine and wind but rather it is harmful to let it go to waste” . Maximizing energy use could also lead to new economical business model such as converting Seawater into drinking water.

This new paradigm, Super Power, will change the energy consumption scenery drastically and lead to upheavals that we cannot even foresee. As insurance brokers, we must investigate the horizon to better understand our client’s vision and help them find new and innovation solutions. We can therefore adequately support your company growth in the energy production and storage sectors even more when implementing new technologies.

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Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

Offshore Wind Insurance

Companies investing in the offshore wind sector need a risk partner with the knowledge and experience to deliver tailored risk advisory and insurance solutions. In addition, having an insurance partner capable and experienced in managing finance parties’ expectations and working with all interested parties in the setting of realistic and reasonable insurance requirements within the debt facility agreements is crucial – a skill set which GrECo have marketing leading expertise in. Choosing the right insurance advisory and placement partner will have a significant and long-term impact on the legal, procurement and insurance strategy, with the target of reducing costs and maximizing insurance and risk management solutions.

Supporting the entire lifecycle

We have the knowledge, experience and commitment to provide clients with in-depth, specialist offshore wind expertise. We work with offshore wind projects to offer contractual risk allocation, project and financial risk management analysis and create insurance strategies that enable our clients to protect cash flow and secure scarce capital across the entire offshore wind lifecycle (Bidding, Consent, Development, Procurement, Construction, Operation and Decommissioning.)

Innovative solutions backed by long-term experience

GrECo is independent, privately-owned company; as such our success and reputation depend on strong partnership with each client. GrECo is able to deliver an innovative, holistic approach to offshore wind project risk and insurance in the local and international insurance markets, underpinned by committed service excellence, a thorough understanding of the offshore wind project’s challenges and complete cost transparency for the solutions proposed.
GrECo together with partners have a proven track record of meeting client’s risk management and insurance requirements, offering deep sector knowledge and service excellence throughout the lifecycle of major renewable energy projects to project developers, operators and investors.

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Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

Michał Olszewski

Director – Energy & Mining Specialty at GrECo Poland

T +48 22 39 33 358

#FutureEnergy: Market Update Q2 2021

This is a series of articles related to the news and development of the global energy sector with focus on Europe, Russia & CIS. The Group Practice Energy, Power & Mining comprises of dedicated group of risk and insurance professionals providing risk and insurance related advice to the companies active in broader energy sector.

Foreword

In this edition of our quarterly update we decided to reflect on the changes to the insurance market for conventional power and renewable energy during the past several months.

A lot is being written, said and analysed on this matter. We tried to provide insights from the broader financial services industry, which will shape the insurance market in the future while the energy sector is undergoing significant reforms.

According to the BP Statistical Review, energy consumption in Europe (including Russia) fell by 1.1% in 2019, between 2008 and 2018 energy consumption in Europe contracted by 0.7%. Energy consumption in developed markets such as a North America and Europe has been steadily declining in contrast to growth in the emerging markets. The decline in energy consumption is set to continue in 2020 as the Covid-19 outbreak coupled with the economic downturn across Europe will weaken energy demand, and in the medium and long run, demographic changes in Europe, in particular a rise in the share of its ageing population, will continue to cause a decline in Europe’s global share of energy demand. On the other hand, as fossil fuels will be phased out from the fuel mix of the European Union, United States and other developed economies, the demand for electricity will keep growing, making investments in the power generation, transmission and distribution systems grow at an ever faster pace.

Several countries in the region have pledged to invest in developing their renewable energy sectors and have set internal greenhouse gas emission targets supplementing those set in the 2016 Paris Agreement.

The energy sector has reduced CO2 emission by 63% since 1990s, according to the report published by Energy Research Partnership. In an article which appeared on Business Insurance on March 16, 2021, Swiss Re pledged to exit all exposures from thermal coal in OECD countries by 2030 and the rest of the world by 2040. The move goes together with the investment policy to achieve net-zero emission by 2050. The reinsurer is one of the founding members of the United Nations Convened Zero Asset Owner Alliance, which includes global carriers like AXA, SCOR, QBE, Generali, Munich Re etc., who are likely to follow suit. The Alliance is representing USD 5,6 trillion assets under management and shows unified action to align portfolios addressing Article 2.1c of the Paris Agreement.

Assuming all projects proceed as planned, the current pipeline of projects will deliver 170.6GW of generating capacity in Europe in 2020-2024. Installed capacity is expected to peak in 2023, with 47GW projected to be installed as new capacity.

Europe – Power Generation, Construction Project Pipeline, Top 10 Countries by Value and Stage (US$ million)

Source: Global Data

Europe – Power Generation, Construction Project Pipeline by Type, Value and Stage (US$ million)

Source Global Data

Focus on Wind Projects

There are several important factors contributing to the sharp rise of rates and deterioration of coverages offered by international re/insurance markets from 2019.

  • Projects are getting larger and more complex. This increases severity of risks significantly.
  • Natural catastrophes occur more frequently and are more severe in nature. This is the reason for concern for the insurers and is rated as top 5 risks according to the Allianz Risk Barometer.
  • Defective products, design and quality control losses are on the rise.
  • Supply chain complexity, just-in-time production and interdependencies are more likely to cause project delays.
  • Political tensions, sanctions, compliance and political violence has become one of the top concerns for project risk managers.

All of them are the result of operation of market forces. At this point it is important to keep in mind that the overall performance of an individual insurer, or the market, is the combination of the result on underwriting activity and investment activity. Continuing underperformance results in either re-underwriting of the existing portfolio or complete withdrawal from writing certain classes or business (or less often, winding down of the whole company). It is also important to understand that the insurance market, unlike many other financial markets (such as public equity and fixed income markets) is not transparent and objective market information is not available usually other than at very high granularity information made available by national regulators and industry trade associations.

Market Performance and General Underwriting Considerations – Hard Phase of the Insurance Cycle

The rating of Engineering and Construction classes of business for Onshore Wind would depend on the following factors:

The Profitability of the entire Insurance Industry

2020 was a year of continuing deterioration of underwriting result and net result. For example, in the Lloyd’s market which provides substantial reinsurance capacity to insurers worldwide, the underwriting loss was GBP 2.67 billion, down from GBP 538 million of loss in 2019. As the investment return also contracted significantly, the market ended 2020 with a total loss of GBP 887 million, down from a profit of GBP 2.53 billion in 2019. As in practical terms it means the erosion of capital across the market, the result is the pressure for immediate action by their shareholders or the Society of Lloyd’s (or any other regulator). The Lloyd’s combined ratio (measure of underwriting profitability) was 110%, however, excluding losses from Covid-19 it was down to 97%, still a very poor result for the entire market. It is estimated that the total amount of underwriting losses suffered by re/insurance markets worldwide were in excess of USD 100 billion across 2020.

Withdrawal of Underwriters from writing certain Classes of Business

Since 2019 this affected Marine Cargo, Engineering and Construction as well as Renewable Energy. It was driven either by Lloyd’s which has the power to accept or reject individual syndicates’ business plans, or the insurers’ own management as a result of changes in their risk appetite. There have also been withdrawals of capacity from major MGAs writing Renewables business such as Pioneer, which unfortunately had to be placed into run-off. Having said that, there have been some new insurers launched across 2020 and 2021, taking advantage from improved rating environment and not burdened with previous years’ losses. Several existing markets have also successfully raised new capital to support their business in the hardening market.

Reinsurance Considerations

The market consensus is that the 1/1 2021 treaty renewals for Power and Renewables sector were higher than a year earlier. Also, the restructuring of treaty provisions, in many cases insurers are no longer protected by their obligatory treaties with respect to active loss attrition on their books. This will affect both direct insurers and facultative reinsurers alike.

Portfolio Rebalancing

For the companies that chose to continue providing coverage this took the form of:

  • Increasing rates – from 10-30% year-on-year on loss-free accounts to 90-100% or more for troubled insureds. Similar adjustment took place across 2019 with 25-50% typical rate increases or even upwards of 100% for complicated or distressed accounts.
  • Deterioration in the length and breadth of coverages provided, increased deductibles and decreased sublimits for certain perils.
  • Decreasing line sizes at renewal, sometimes significantly, or
  • Not offering renewal terms for distressed accounts. For example, according to one reputable London market, their retention rate of Renewables accounts was around 40% in 2020.

Accounts Performance

With the trough of the pricing cycle for Onshore Wind in the Summer months of 2018, 2020 was yet another year which brought about deteriorating claims and reserves development experience for the Renewable Energy insurances. For example, the adverse development of losses incurred in 2018 moved the loss ratio for that period for an initial estimate of 66% to 80% as of 2020, which made the 2018 year of account unprofitable. This of course needs to be reflected in rating adjustments for insurances sold in future years.
Notable causes of rating increases for Onshore Wind projects typically include:

  • Natural Catastrophe losses – even though no spectacular losses occurred throughout 2020, smaller scale catastrophes give rise to increasing loss activity.
  • Ageing of the fleet – increasing number of attritional losses and the need to replace ageing assets with modern technology, which is affected by costs, materials and labor inflation.
  • Constant upscaling and upgrading process of generators, which make them significantly larger and more expensive, also in terms of replacement and re-erection costs. Also, the boundary between the upscaled and the prototypical becomes ever more blurred as a result of the process.
  • Adequacy of “old” deductibles is being questioned by insurers, as it the view of many they no longer reflect the specifics of new technologies and substantially larger and more powerful units.
  • Concerns about the performance of the Engineering and Construction book – it has been noted that the contractors may be taking on too much workload (due to fast-increasing demand) which causes them to rush some projects to the point where there is a perceived increase risk of losses in the construction phase. In fact, data from some markets show that for 2020, contractor error losses amounted to about 36% of the quantum of all wind losses. As a result, the construction phase attracts the highest rating increases in the wind farm life cycle. The same applies to the increase in deductibles required by insurance markets. Unfortunately, the increasing demand pressure on major contractors makes them unwilling to give concessions to their clients as their order book is filling up quickly as old conventional assets are being phased out, making their bargaining position ever stronger.
  • The Covid-19 pandemic affected some routine claims handling (such as inspection dismantling, re-erection), risk engineering, as well as manufacturing processes. This affects both loss settlement times and – more importantly – the quantum of Business Income (BI/ALOP/MLOP/DSU/MDSU) losses.

Diminishing Returns on Investing Activity

For many years, deficiencies in the performance of the underwriting function would normally be corrected by returns on the investing activity. It used to be normal that in certain classes of business combined ratio of 110% was accepted for prolonged period (meaning that on every USD100 of premium there were losses and costs of USD110 incurred). With negative interest rates environment prevailing for a prolonged time and increased asset price volatility this is no longer the case and the insurers are pushed towards technical (underwriting) profitability.

Related Insights

Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

Blackout all over Europe, and then?

A pan-European power and infrastructure failure, a so-called blackout, would bring our society to the brink of collapse within a few days.

Neither the people nor the companies or the state are prepared for these kinds of wide-spread utility failures. We are living in a dangerous state of false security. But how realistic is this scenario and what would be its consequences?

The European power grid is one of the most reliable in the world. From a risk calculation perspective, the likelihood of a complete failure is very low, as this sort of event has never happened in Europe. However, the challenges to secure grid operation and the risk of major disruptions or failures have been increasing for many years. There are many reasons for this. They range from a power market that knows no physical limits, to an energy revolution that ignores systemic interrelationships and only calls for the replacement of individual elements, to new vulnerabilities arising from increased connectivity.

First phase of the blackout

A disruption can spread across large parts of Europe within seconds. It could take a week before the entire European grid system is working reasonably again. However, that is just the first phase of a blackout that grid operators have been anticipating for years. Emergency power generators are often used in other areas as a security measure. However, they can only cover a fraction of actual requirements. Performance is usually highly overestimated and susceptibility highly underestimated in this situation.

Second phase of the blackout

The second phase of the blackout until telecommunications services (fixed and mobile networks, internet) are working reasonably again is also completely underestimated. A recovery period of at least a few days should be anticipated due to expected hardware damage and overloads. The duration of the power failure is decisive here.
The longer the power failure lasts, the more difficult and time-consuming it is to reboot these systems. This means that neither the production nor the distribution logistics or sale of goods are possible. Fuel logistics would not function either. There are simply too many – and often ignored – dependencies in supply logistics and many of these are transnational. Just two examples of many:

  1. in a local power failure, a key network component loses its configuration and the entire IT network and telephone system no longer work;
  2. a necessary online connection to the cash register drops out at a petrol station being supplied with back-up power and prevents fuel from being distributed.

Third phase with time-consuming restarts

A chain is only as strong as its weakest link. Supply bottlenecks lasting several months are to be expected as a result of serious damage and total failures in food production, food processing and food distribution. This means that time-consuming restarts are also to be expected in phase three.

As an Austrian security research study has shown, around one-third of the population thinks it will be self-reliant for a maximum of four days. For an additional one-third, the figure is seven days. However, it will only be possible to restart on a broader scale in the second week at the earliest.

Generally speaking, employees and members of the emergency services or companies are not much better prepared and organised than the rest of society. However, if people are in crisis at home and are starving, they will not come to work to reboot the systems or to maintain an emergency supply. This is the start of a vicious circle.

Help the people to help themselves

Helping the people to help themselves is the main basis for all other necessary measures. Only when as many people as possible are able to keep their heads above water for at least two weeks will a rapid and extensive restart be possible.
However, there is a lack of awareness of this because there is hardly any risk and safety communication, usually out of misconceived consideration. “We don’t want to unsettle people,” is a recurring statement.But it is precisely this appeasement that provides for early escalation and uncontrollability.
A population that is self-sufficient is essential for any type of interruptions in supply and a prerequisite for a resilient society. In order to ensure that more and more people take precautions, it is essential to issue safety communications and information openly and honestly. It remains to be seen whether the coronavirus crisis will cause a change in mindset in the long term.

Herbert Saurugg, MSc
Präsident der Österreichischen
Gesellschaft für Krisenvorsorge
T +43 660 3633896
praesident@gfkv.at
www.krisenvorsorge.jetzt

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Rudolf Schiel

Practice Leader Property & Engineering

T +43 664 822 27 58

Ain’t no sunshine

We are debunking four myths about parametric insurance for renewable energy

Parametric insurance has been around since 1990s although the reinsurance industry has been using the parametric structures with catastrophe bonds for more than 30 years. Back then it was considered a novel product, but it may now be reaching new levels of popularity with the renewable energy investors and producers due to rapid advancement of technology and increasing quality of data around the world. For example, insurance companies can now build better indices to approximate the yearly average energy production of a windfarm and the insured can protect his revenues using index based parametric insurance.

One of the key motivators for the companies to purchase such insurance is its efficiency. The wordings have only a few pages, the indemnity amounts are clearly defined and the Insureds avoid lengthy claims investigations, coverage disputes and payment delays.
Flexibility is also another important factor that contributes to the adoption of the product. All the parameters can be tailor made to perfectly suit the risk management objectives and the Insured is also free to use the payouts the way he likes, unlike traditional insurance. Basically, an index is triggered, payout is made – no questions asked.

Another key criteria is the reduction of volatility, hence, the predictability of future revenues, transparency and objectivity of underlying parameters by applying parametric insurance as a protection against weather underperformance.

Despite its efficiency and speed the use of the product has been limited, at best. We decided to investigate the intrinsic details of the coverage and debunk common myths associated with index-based insurance solutions for renewable energy sector.

Myth #1 – parametric insurance is not suited for SME and mid-corporate buyers

Although initially designed to transfer high and catastrophic risks on a country level especially in regions like Caribbean, advances in data science, sensor technology and artificial intelligence have allowed for the creation of a broader assortment of informational indexes. This opened the door to new applications for parametric insurance that go well beyond the traditional natural catastrophe uses. The payout schemes have evolved from the eye of a tornado going through a specific geographical circle through a modular payout based on the speed of wind at a precise location, ensuring incremental payouts according to the exact nature of the catastrophic event.

It is a common misconception that parametric insurance can replace the traditional indemnity-based insurance coverage. It is a complementary coverage and should be purchased together with the traditional property damage and business interruption policies.

Renewable energy industry is heavily dependent on the availability of the financing. Therefore, index-based insurance, also known as sun or wind resource volatility insurance, provides additional protection to the investors while it stabilizes the revenue streams and increases the risk rating of the project.

Project managers face a project risk transfer gap, which occurs between the contractual warranties and available insurance coverage. Whilst the traditional insurance contracts facilitate the transfer caused by man-made (machinery breakdown, fire etc.) and natural perils, parametric insurance is designed to transfer the weather underperformance risk where traditional policies apply exclusions or simply do not respond to specific adverse events such as insufficient or excess resource availability. According to GCube, the weather risk gap of insurance is estimated to reach over 56 billion USD.

Myth #2 – parametric insurance is complicated

Let’s start at the beginning. The Oxford Dictionary defines the adjective parametric as “relating to or expressed in terms of a parameter or parameters”. When applied to insurance, that means coverage is triggered by a parameter – i.e. a metric or an index – that is easy to determine. An insurable trigger needs to be fortuitous and insurers need to be able to model it. Parameter or index used for the basis of a parametric insurance solution must be objective (i.e. independently verifiable), transparent, and consistent. This is important for investors, as it eliminates the information asymmetry and the moral hazard.

Basis Risk
While parametric insurance has all the advantages of the cost-effective risk mitigation and transfer tool for renewable energy projects, it does have its shortcomings. This phenomenon is often referred to as Basis Risk. It is commonly considered as a “near-miss factor” or the event where the trigger index does not perfectly correlate with the underlying risk exposure, resulting in a situation where a policyholder suffers a loss but does not receive payment. For example, measured wind speed might fall within the insurable range, but the insured did not suffer loss of revenue below the pre-determined index, hence no payout.

Structured Index
When we speak about the sun or wind resource volatility index, we usually refer to the double-trigger policies, which require that a pre-determined parameter threshold is reached and the insured has sustained the actual financial loss, e.g. loss of revenue due to lack of wind.

The index is usually structured as a function of wind speed or solar irradiation level, and plant efficiency factor. The insured can choose the desired protection by defining the Strike, acting as a deductible, and the Exit point. The annual estimated energy production between the Strike and Exit represents the Total Sum Insured. The premium is consequent upon the wind speed historical volatility and the Strike and Exit scenario chosen by the client.

In case production energy production falls below a certain level, e.g. 98% (Strike), the payout is activated until the Exit scenario, e.g. 80%. The magnitude of the payout is determined by the actual loss of generation income for the plant. Hence, the index fluctuates, whereas the actual revenues remain almost constant. The volatility is reduced, and the project delivers revenue streams in accordance with the financing model.

Myth #3 – parametric insurance is expensive

Contrary to the common belief, parametric insurance is very cost-effective provided that correct index has been structured for the specific renewable energy type.

According to Modern Energy Management, the majority of renewable energy projects face significant cost overruns, which are mainly due to the failure to properly identify and transfer project risks. This creates often a huge gap in risk transfer, whereas the investors and lenders end up assuming greater project risk than they should. One of the main reasons is that the project contracts and insurance is often developed in isolation.

Parametric insurance reduces volatility of the projected income, thus enabling a steady, predictable stream of revenues that appeal to lenders and investors alike. Quite often it helps to reduce cost of capital by pushing the interest rates down and increasing the debt/equity ratio.

Investors must juggle with all the characteristics of the project to maximize the revenues generated from their investment. Vaisala has calculated that 33% of the total energy production uncertainty for a windfarm project comes from both the historical and the future wind resource variability. This is exactly what the index based parametric insurance is designed to mitigate.

For example, many solar farms secure their financing at P95 level, hence, leaving a 5% chance of not achieving the planned annual energy production. However, after reviewing over 200,000 solar farm projects, WindAnalytics has found out that the P99 radiance probability of a catastrophically bad year is not 1% as mathematically calculated but rather 6.3%. The consequence is that a project financed for 7 years with a loan size based on 1xP99 metric results has a 37% chance of defaulting in a given year.

Parametric insurance can appear costly when compared to the traditional indemnity-based insurance. The premium may range between 0,5% and 5% of the purchased limit, whereas the conventional policy will have a premium rate much lower than the index-based solution. Such comparison is not entirely correct. Property Damage and Business Interruption policies cover loss of or damage to insured property and the business interruption resulting therefrom. They require a physical loss or damage in order for the coverage to be triggered and have extensive list of warranties, subjectivities and exclusions incorporated in their wordings. Index-based policies, however, do not require a physical loss to reimburse the insured for the economic cost of the adverse event.

The index based parametric insurance can be structured in many different ways. The scenario, which involves a low Strike and high Exit, will result in minimum premium level. On the opposite, if the client choses a very high strike and a low exit, the expected premium will be a lot higher. The Insured will have received larger payouts. The product should be structured to match key project objectives, from securing the lenders and improving the credit rating of the project to reducing the volatility of future revenues to a minimum level.

Myth #4 – regulators do not approve parametric insurance as insurance

Insurers offering parametric insurance have to overcome the regulatory challenges. Those who are already offering such products usually use double trigger policies, which require the proof of loss by the insured even though both types of policies function similarly to derivatives. The main difference is the insurable interest, which derivatives lack. In certain countries, where the regulatory framework does not explicitly address the use of parametric, it is important that the indemnity payment does not exceed the actual sustained loss and that the insured can prove existence of the same.

One of the main issues regarding risk management in renewable energy projects is the confusion on how to best manage weather-related volume risks. In order to provide answers to this, insurance broker should be involved as early as the planning stage of the project, i.e. before the contract is drafted, negotiated and signed. Early involvement ensures the closing of the risk transfer gap and securing the best terms and conditions for the project`s finance. Parametric insurance can be tailored to match project of any size and budget.

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Zviadi Vardosanidze

Group Practice Leader Energy, Power and Mining

T +43 664 962 39 04

Blackout – when it suddenly gets dark

While we’re all still dealing with the effects of the COVID-19 crisis, the next shutdown could be just around the corner. Experts predict that a so-called blackout will occur within the next five years. This is a large-scale failure of the power supply that would result in the collapse of the entire infrastructure and furthermore cause catastrophic restrictions in our everyday life. Because without electricity everything stands still: telecommunications, water and fuel supply, traffic control, heating and air conditioning, computer systems and much more are not available for an indefinite period of time, which can result in significant business interruptions for all industries and production companies.

The triggers are manifold…

There could be many reasons for a blackout: cyber and terrorist attacks, natural disasters, human error and, above all, insufficient network stability. The power supply is based on systems that are prone to errors due to their complexity, which triggers chain reactions that can lead to nationwide service interruptions. It is not possible to permanently eliminate all these potential causes, so the threat of a future blackout is severe.

In March 2015, for example, 80 out of 81 provinces in Turkey suffered a 10-hour power outage. Public transport stopped, traffic lights failed and the result was a fundamental traffic chaos. The total economic damage amounted to several hundred million EUR. Initially, a cyber-attack was suspected as the trigger, but in the end the variations in the Turkish power grid were identified as the cause of the blackout.

Similar incidents have occurred on all continents several times in the past decades, but what is striking is the increasing number of power outages in recent years, which is probably due to the increasingly complex networking of the power infrastructure and the growing proportion of alternative power generation with wind mills or solar energy.

…the solutions in risk and insurance management as well!

Whether and to what extent property and business interruption policies provide insurance protection for the consequences of such events can only be assessed for the individual cases and depends on the respective circumstances and the underlying insurance conditions. In the common extension clauses for business interruption damage due to service interruption, however, the occurrence of physical property damage (e.g. a fire at the suppliers premises) is a precondition.

We therefore recommend to our clients to analyze the potential effects of a blackout together with our experts in the course of a mutual risk dialog and to adapt the necessary insurance cover to the respective demand as best as possible.

Of course, well-functioning risk management also plays a decisive role in dealing with service interruptions due to longer-lasting power failures. Blackout scenarios should therefore also be taken into account in the emergency and business continuity management plans and appropriate preventive measures should be established so that consequential damage, such as the failure of critical cooling systems, will not occur and potential business interruption loss is limited as far as possible. Our risk engineers from GrECo Risk Engineering GmbH are also happy to provide further information and advice on risk and business continuity management in case of a blackout.

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