Power Blackout Risks

editor:
Markus Aichinger (Allianz)
 
Grateful acknowledgment to all CRO Forum Emerging Risk Initiative member companies
for their comments and revisions. 
Title picture: Credit: C. Mayhew & R. Simmon (NASA/GSFC), NOAA/ NGDC, DMSP Digital Archive 
Layout: volk:art51, Munich | Printing: Mühlbauer Druck, Munich

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3
crobriefing on Power Blackout Risks
1. Summary
Blackouts during the last ten years in Europe and Northern America have demonstrated an increasing likelihood
of supra-regional blackouts with accompanying large economic losses. The earthquake, tsunami damage and 
power shortages that idled thousands of Japan’s factories in 2011 highlighted its role as a key – and sometimes 
the only – source of auto parts, graphics chips and other high-end components. Many manufacturers are currently 
using up the inventories that they had in stock before the earthquake. A similar situation could occur as a result 
of a larger power outage and this risk may further increase in the future. One reason are insufficient incentives to 
invest in reliable power supply infrastructures. But new and smarter grids including storage capacities (e.g. pumped- 
storage hydropower plants) are required to handle the future growth of volatile renewable energies, which are 
located far away from the centres of demand. Furthermore the vulnerability of the power supply industry, the 
industrial and commercial companies and the public and private sector is high due to the interconnectedness 
and dependency of all areas on Information and Communication Technology (ICT), navigational systems and 
other electronic devices. 
Whereas short term power blackouts are experienced frequently on a local or regional level around the world
(e.g. caused by natural catastrophe events like earthquakes, storms, floods or heat waves), societies are not familiar 
with large scale, long-lasting, disruptive power blackouts. Traditional scenarios only assume blackouts for a few days 
and losses seem to be moderate, but if we are considering longer lasting blackouts, which are most likely from space 
weather or coordinated cyber or terrorist attacks, the impacts on society and economy might be significant. 
So far insurance companies were not affected significantly beyond taking care of their own business continuity 
management in order to mitigate losses following a blackout. Risk transfer via insurance has usually required 
physical damage to either the insured’s assets or the assets of specific service providers to trigger a business 
interruption claim. But only 20% to 25% of business interruptions, such as supply chain disruptions are related to
a physical loss
1
. Therefore insured persons and organisations should be aware that they may face huge uninsured 
losses. This might trigger an increasing demand for new risk transfer solutions related to power blackout risks in 
the future. 
The insurance industry can offer well contained event covers which fulfil the principles of insurance: randomness, 
assessability, mutuality and economic viability whereas utilities and governments have to increase their efforts to 
make our power infrastructure resilient against such events.
1
http://fpn.advisen.com/articles/article140935191888258975.html

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4
2. Power blackouts challenge society and economy 
Electricity is the backbone of each industrialised society and economy. Modern countries are not used
to having even short power blackouts. The increased dependency on continuous power supply related to 
electronics, industrial production, and daily life makes todays’ society much more vulnerable concerning power 
supply interruptions. A brownout (reduced voltage) of some minutes or a similar blackout (complete failure of 
electricity supply) may cause some inconvenience at home such as having the lights turn off. But a blackout
of a few hours or even several days would have a significant impact on our daily life and the entire economy. 
Critical infrastructure such as communication and transport would be hampered, the heating and water supply 
would stop and production processes and trading would cease. Emergency services like fire, police or ambulance 
could not be called due the breakdown of the telecommunication systems. Hospitals would only be able to work 
as long as the emergency power supply is supplied with fuel. Financial trading, cash machines and supermarkets 
would in turn have to close down, which would ultimately cause a catastrophic scenario. If the blackout were to 
spread across the border lines, which is more likely today due to the interconnection of power grids between 
different countries, the impacts would escalate as a function of the duration of the interruption.
The following position paper highlights the risks and future trends linked to power blackouts. It further explores risk 
management options including operational risk management measures, the importance of a high quality business 
continuity management plan and risk transfer options. Furthermore it emphasizes the insurance industry’s options 
to expand coverage based on physical damage and to consider new non-physical damage insurance solutions. 
This might be insurance cover or alternative risk transfer solutions, which respond and cover emerging risks such 
as power outages, but also political risks, pandemics and/or supply chain disruptions.
picture alliance/dpa

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5
crobriefing on Power Blackout Risks
3.1. How power market trends influence blackout risks 
The worldwide power supply industry experienced two major changes in the last ten to twenty years:
•
Liberalisation and privatisation
•
Expansion of renewable energy production capacities