New Model Promises to Quantify Losses Triggered by Power Outages

August 30, 2013 by

Total economic losses due to power outages in the United States are estimated to be over $100 billion per year, according to Robin Luo, vice president and blackout model project manager at Hartford Steam Boiler.

The main causes of electrical blackouts are volatile weather, aging infrastructures, inferior transmissions, transmission capacity limits as well as system and human errors, said Luo.

To address the increasing problem of electrical blackouts and their increasing frequency, Atmospheric and Environmental Research, a unit of Verisk Analytics, and HSB announced a new strategic partnership.

“The goal is to combine, enhance and commercialize our blackout data technologies and expertise that both companies have built, calibrated and applied using our businesses over the past decade. We feel that new technology and tools are essential for our industry to assess and manage financial risks to their assets and liabilities,” said Luo.

Luo said that the new model developed by AER and HSB, in addition to assessing the financial impact, will help companies plan for rapid response after an event, as well as minimize the effect on businesses while helping insurers provide improved customer service to policyholders.

The blackout risk model will concentrate on certain perils, according to Luo.

“Power outages are different. If you think about it, many causes could trigger a power outage,” he said.

The HSB vice president outlined a few perils, including hurricanes, winter storms and system limitations.

“Our grids are old. Our equipment is aging. Also, there is a significant amount of operations involved in managing a grid. Our model has built in, not only the weather or external environmental factors, we also built in the grid equipment and power engineering side of the factors into that model,” Luo said.

The new blackout risk assessment model will be launched at the Property Casualty Insurers Association of America annual conference to be held October 22-23 in Boston.

“Our plan right now is to offer tailored consulting services using our proprietary model and our engineering expertise to address individual customer’s needs and concerns,” he said. “In our consulting service, we’re really shining a light on the power outage cost and indirect losses. We will help our insurers to determine probable risk accumulations and the probability to insure the loss with confidence.”

The new model promises to help insurers predict the types of losses that will result from a power outage.

“Power outages may impact multiple lines of business. Potential losses could be spoilage to perishable goods, business interruption, contingent business interruption losses, equipment breakdown, fire caused by alternative lighting and heat source when you use candles or other heat sources, water damage due to freezing pipes, workers’ comp and other general liability losses,” the blackout model project manager said.

In addition, insurers will be able to assess risk by geographic location and grid area, he said.

“We will also help them [insurers] to calculate the loss potentials to their current and future coverages,” Luo said.

The HSB vice president said he expects that in addition to getting potential underwriting benefits, insurers will be able to better evaluate risk reduction and risk transfer solutions when accumulation is excessive.

“We will help them [insurers] to better assess the blackout risks associated with integral locations and accounts to better optimize underwriting a portfolio risk management approach,” he said.

Ultimately, Luo hopes the blackout risk model will trigger product innovation by insurers.

Listen to the podcast interview with Robin Luo.