Power Blackout Risks

5.3.3. future risk transfer products
Physical damage to premises or distribution lines of electricity producers and distributors are likely to remain
the main exposures. Contingent BI exposures remain the most important feature for electricity consumers. 
Subject to an increasing trend for electricity interruptions, consumers’ preparedness to buy specific insurance 
coverage is likely to increase. The insurance industry may be able to include the most frequent failures due to 
damage to transmission and distribution lines and consequently manage the increased accumulation potential.
Nonphysical damage business interruption insurances, like coverage for fluctuations in the weather pattern, 
volcanic ash clouds or pandemics, will hardly become more than complementary. Reasons for this are the 
accumulation potential, the low number of insurers prepared to offer coverage, high premiums, scarce capacity 
and a small number of interested parties to buy such coverage. However, additional elements of nonphysical 
damage coverage may be designed to cater for specific needs of industrial and commercial clients. Perils that 
could suit such purpose are a lack of cooling water for power plants due to extended periods of drought or 
interruption of electricity production due to safety measures required by public authorities. Interruptions due to 
safety concerns have recently taken place in Japan as a consequence of earthquake damage to the Japanese 
power and distribution industry. 
BI insurance not based on physical damage may, in addition, move away from the indemnity principle. Fixed sums 
insurances for BI loss could use parametric triggers such as the number of hours or days of electricity failure.
5.3.4. residual risk acceptance
The risk that remains with the threatened subject is the residual risk. It is either not insured or not entirely 
insured: 
•
One of the main reasons for not insuring an insurable exposure is the amount of premium required
for coverage. 
•
Insurers accept only a part of insureds’ exposures. They introduce sub limits, risk or loss retentions.
•
The boundaries between insurable and noninsurable risks are not clear cut. In some instances seemingly 
noninsurable risks can be made insurable (high risk retentions and exposure limitations). Furthermore, the 
insurance market is developing and extending the limits of insurability. However, insurability generally ends 
where the occurrence of the feared event or the date of occurrence (e.g. in life insurance) is not fortuitous 
anymore.
Potential insureds need to customise their insurance protection considering the above mentioned restrictions
and accept some residual risk.

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crobriefing on Power Blackout Risks
6. Conclusion
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 
economical 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 noncovered 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 nonphysical business interruption risks in general.
It presents a great challenge, however, to handle those intangible risks while also offering a great opportunity to 
invest in the development of tailored insurance products (potentially combined with busines continuity management 
services) which fulfil customer demand and the requirements for insurability. Furthermore insurers need to review 
their own BCM capabilities concerning blackout risks to make sure that they can provide services even in the case 
of long-lasting blackouts.
When risk management is done well and risks can be reliably quantified, insurance is an important mechanism 
for risk transfer. All parties, insurers, electricity industry and consumers should engage in risk dialogues to pro-
actively address and manage related power blackout risks with the aim to maintain one of the most important 
goods in a civilized society, a reliable supply of electricity.

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7. Annex