Black Swans

The Darkness of the Sun

A fast-moving geomagnetic storm blasts the North American power grid, leaving a large swath of the Northeastern U.S. temporarily uninhabitable.
By: | August 3, 2015 • 10 min read

“Daddy, wake up! Come see the rainbows!” 6-year-old Amanda LeBlanc insisted as she shook her father out of his slumber. Joel LeBlanc stirred slowly, feeling like he hadn’t slept at all.

“What? Go back to bed,” he grumbled, rolling over.

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“No, Daddy you have to look,” insisted Amanda, throwing the bedroom curtains wide open. Joel squinted at the light, confused. It was way too early for sunrise, wasn’t it?

Joel hoisted himself out of bed and joined his daughter at the window, catching his breath at the sight. “Huh. You know what that is, honey? It’s called an aurora. Don’t see that every day — not in Florida anyway.”

“I’m going outside to take a picture,” Amanda declared, cantering off.

Northward, there was less wonderment and more worry. Scientists had warned that week of a large coronal mass ejection (CME) that the sun had hurled toward Earth. Only three days later, it was followed by a pair of still-larger CMEs. The latter two bursts combined during their brief journey from the sun, pushing billions of tons of highly charged particles toward Earth at unprecedented speed, thanks to the path cleared by the earlier blast.

Scientists’ predictions on the size and speed of the event fell short of the mark. But even if they’d been right about everything else, they couldn’t have gauged that the CME’s magnetic field was aligned in a way that left Earth at its most vulnerable, allowing the maximum infusion of charged plasma into the Earth’s magnetosphere. It was a recipe for a perfect solar superstorm.

Video: This 1:31 minute time lapse video by Brendan Hall shows an aurora borealis in Kalispell, Mont., that occurred over 1.5 hours in June 2015.

By the time the NOAA Space Weather Prediction Center issued an urgent warning, there were only minutes left to act. Power generation companies kicked into emergency mode, working to mitigate the impact by taking transformers offline.

But even large generators couldn’t act fast enough. Geomagnetically induced currents flowed into the power grid in a matter of minutes, overheating extra-high-voltage (EHV) transformers and frying coils, destroying or damaging hundreds.

The North Atlantic corridor was hardest hit, thanks to higher ground conductivity along the coastline. In short order, upwards of 35 million people from New York City to Washington, D.C. were suddenly without power. There was an eerie stillness that morning as schools and many businesses were forced to remain shuttered.

Backup-generator owners went in search of fuel, but most gas pumps had stopped functioning immediately or soon afterward.

ATMs were all down. Within hours, land and cell phones would fail, and water could no longer pump. Worse, wastewater treatment plants shut down, causing sewage to overflow into drinking water.

Beyond the area affected by the power outage, disruptions to global positioning systems and satellite communications wreaked havoc with cellular networks, financial transaction processing and logistics operations.

The hardy Northeasterners made the best of it at first, boiling water on camp stoves, firing up barbecues and grilling the thawing food from their freezers. But before the week was out, nerves had frayed. Residents and businesses demanded answers from utilities and government officials.

The news was bad — very bad. It’s not as if hundreds of EHV transformers were warehoused waiting to be called into service. Replacements had to be ordered. and replacement for any given transformer would be at least five months and possibly up to a year or even longer, given the high level of need and the short list of manufacturers.

Units coming from foreign manufacturers would take even longer, involving arduous and complex transportation arrangements.

Residents and business owners were stunned. Public officials explained that with no power or fuel, no water pumps or waste treatment facilities, no readily accessible food supply and badly strained emergency services, there was no option other than to evacuate the affected regions.

The impact to the economy was staggering. National companies struggled to maintain communications with evacuating employees, while putting plans in place to shift operations to other locations. But an overwhelming number of small and mid-sized local businesses without the means to relocate simply folded.

Companies with business interruption or contingent business interruption policies presumably triggered by the mandatory evacuation breathed a sigh of relief, not yet aware of the lengthy battles they’d face later on about whether or not fried transformers, or the incapacity of the power grid itself, constituted a property damage trigger under policy terms.

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Supply chains nationally and globally faced upheaval as companies raced to secure secondary suppliers. Those select few companies that had chosen to take up supply chain coverage quietly congratulated themselves and used the opportunity to its fullest advantage while their competitors faltered.

Once the dust had settled, much of the North-Atlantic corridor was a patchwork of ghost towns. Members of the Army and National Guard were stationed in the region to curtail damage from looters and gangs who evaded evacution, sometimes squatting in unoccupied buildings and setting fires at night for light and warmth. Many buildings that hosted squatters would eventually need to be condemned.

Two years later, a handful of transformers still awaited replacement. Only a fraction of the evacuated population had returned, and local governments struggled to rebuild long-vacant communities. Estimates calculated the total economic cost at upwards of $2 trillion.R8-15p30-32_03Carrington.indd

The Inevitable Storm

The largest solar storm in recorded history occurred in 1859. It was dubbed the Carrington Event, after British astronomer Richard Carrington, who witnessed the megaflare. He was the first to realize the link between activity on the sun and geomagnetic disturbances on Earth.

During the event, Northern Lights were reported as far south as Cuba and Honolulu. The flares were so powerful that people in the Northeastern United States could read their newspapers just from the light of the aurora. U.S. telegraph operators reported sparks leaping from their equipment — in many cases setting fire to nearby materials.

Now, take a storm of that magnitude and let it play out in the modern world. Far smaller events have occurred many times. One such storm struck in 1989, taking out Quebec’s power grid in less than two minutes, causing $6 billion in damages and leaving millions of people without power for nine hours.

For the sake of comparison, scientists measure these storms using an index based on nano-Teslas (nT). The lower the number, the harder the Earth’s magnetic field shakes when a storm hits. The Quebec storm in 1989 measured at -589 nT. The far more powerful Carrington Event is estimated at around -850 nT.

And then there was a near miss in July 2012. Had that solar blast occurred only one week sooner, the Earth would have been directly in its path, and scientists calculated the storm would have clocked in at up to -1,200 nT. The fabric of society would have been profoundly altered, and we would still be picking up the pieces today.

“The concern becomes, now that we know, do we make the choice to act?” — Kyle Beatty, president, Verisk Climate

There is more or less universal agreement among experts and scientists that another Carrington-level event or stronger is an inevitability — the only uncertainty is when. Some experts even opine that this kind of event shouldn’t even be called a Black Swan, because the probability is higher than most might realize.

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In an article published in the journal “Space Weather” in 2012, solar scientist Pete Riley of Predictive Science Inc. calculated that the probability of a solar storm at the power of the Carrington Event or stronger in the next 10 years is around 12 percent.

The potential impact of such an event to our hyper-connected, electricity- and satellite-dependent society is a sobering prospect, and one that is netting an increasing amount of interest.

In 2013, Lloyd’s published the report that our scenario is partially based on, “Solar Storm Risk to the North American Power Grid,” in partnership with Atmospheric and Environmental Research Inc. (AER), a division of Verisk Climate.

Kyle Beatty, president, Verisk Climate

Kyle Beatty, president, Verisk Climate

“This is a topic that is drawing strong interest in the government levels at a national and international scale, because the impacts could be so large and because this is one of the only natural perils that could create simultaneous impact across continents,” said Kyle Beatty, Verisk Climate president, who worked on the study. “… When we get into an event of this size, it would impact Europe as well — it’s a global phenomenon.”

“We understood that the engineering and science communities were talking about space weather as a potentially high impact phenomenon,” added Nick Beecroft, emerging risks and research manager at Lloyd’s of London.

“But we felt that the understanding of the phenomenon and the potential impact on the insurance industry was very limited.”

Doomsday Assumptions

Experts stress that while it’s popular to paint this level of solar superstorm as a virtual “doomsday” event, that outcome need not be the case. The key is to commit to doing something about it now.

Nick Beecroft, emerging risks and research manager, Lloyd’s of London

Nick Beecroft, emerging risks and research manager, Lloyd’s of London

Since the 1989 Quebec storm, the Canadian government has invested $1.2 billion into protecting the Hydro-Quebec grid infrastructure. But you have to wonder how many billions could have been saved if that investment had come sooner.

“If we were to experience a major solar storm event — and I really should say it’s a question of when, not if — there could be extreme ramifications for power grids and for all those technologies that rely on satellite navigation systems,” said Beecroft.

It would require worldwide cooperation and investment to build in resilience to key systems, he said, as well as enhanced satellite systems and technology to improve monitoring and early warning systems for space weather events. In addition, it’s likely there would be “much greater demand for specific insurance products that would be able to respond to an event like this.”

At the risk manager level, Beecroft said, organizations around the world should be thinking “about how they can diversify their reliance on power systems and on key technologies.”

But Beecroft and other experts drive home that there is simply no reason for all of these things to happen after the fact.

“The concern becomes, now that we know, do we make the choice to act?” Beatty asked.

Something else that needs to happen sooner rather than later is the development of strong plans and procedures, especially on the part of power generation companies, said Lou Gritzo, vice president of research at FM Global.

Lou Gritzo, vice president of research, FM Global

Lou Gritzo, vice president of research, FM Global

Gritzo said the nonprofit North American Electric Reliability Corp. (NERC) has already developed recommendations to help power generators respond in such an event.

“The big wildcard is, when push comes to shove and power generators have to make those difficult decisions about what they’re going to do, do they do the right things? And how many of them do the right things?” he said.

The ideal scenario, said Gritzo, is that when the storm hits, the power generators most likely to be affected by the storm disconnect their power supply from the grid and adequate power can be temporarily supplied to the grid by other generators in areas where the storm is not going to be as intense.

The ability to make that happen quickly, said Gritzo, could go a long way toward shifting from a doomsday scenario to one of minimal consequences.

He also said risk managers should be asking power suppliers some hard questions to help them assess the need for additional investments, such as a backup power system.

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Not taking any action would be a mistake. “If there’s one number in this whole report that’s significant,” said Beatty, “it’s the estimate that the return period of a Carrington-like event is estimated at around 150 years,” a figure that can be backed up with evidence tracing back to 17 B.C.

Bottom line, he said, is that “the likelihood is high enough that we actually have a responsibility to act.”

BlackBar

Additional 2015 Black Swan coverage:

TURNERWelcome to the ARkStorm

A 45-day superstorm floods California and dishes out economic catastrophe.

R8-15p26-28_02Bomb.inddTo Clean Up a Dirty Fight

A dirty bomb detonated in Manhattan could make a ghost town of the most populous city in the U.S.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]