Nuclear TPL insuranceNuclear TPL insurance

RNIP presentation 10RNIP presentation 10thth March 2010 March 2010M Tetley, Nuclear Risks Insurers Ltd, London.

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Liability & property insurancesLiability & property insurances

Onsite – assets & cash flowOnsite – assets & cash flowProperty insuranceProperty insurance

Offsite – legal obligationsOffsite – legal obligationsLiability insuranceLiability insurance

Bruce site, ON, CanadaBruce site, ON, Canada

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Why is insuring nuclear different?Why is insuring nuclear different?

The risk…• Failure to control the nuclear chain reaction leading to…..

– Catastrophic radioactive contamination of a widespread area,– Extensive plant damage.

Problems for insurers…• Events potentially very high severity but low frequency.• Low number of nuclear sites: 500 sites & premium approx

$600m globally (2007); about 0.04% of total global premium.

• Insufficient actuarial data - only theoretical calculations as industry loss record good.

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Practical experiencePractical experienceChernobyl 1986

• > 110,000 evacuations & re-housing – cost $3bn+?

• 600,000 involved in recovery operation

• Europe wide spread of radioactive cloud

• Consumption & export of foods interrupted over a wide area

• No insurance• < 2,000 victims eventually?

Three Mile Island 1979• 11,000 evacuations• Claims office established

day after event; publicised using the media

• Immediate “hardship” payments of $1.3m made by insurers

• Class action for business interruption & loss of earnings

• Substantial insurance loss excess of $70m to TPL policies

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History of nuclear TPL insurance IHistory of nuclear TPL insurance I

Extract from a report on the nuclear industry prepared by UK insurers in April 1957:

““..circumstances may arise which can result in loss of ..circumstances may arise which can result in loss of control over an atomic reaction. Should this happen control over an atomic reaction. Should this happen

it has to be envisaged that radioactive products in it has to be envisaged that radioactive products in the form of vapour or dust, may escape from the the form of vapour or dust, may escape from the

normal confines of the reactor installation into the normal confines of the reactor installation into the atmosphere and…adversely affect all forms of atmosphere and…adversely affect all forms of property..and cause injury to both human and property..and cause injury to both human and

animal life.”animal life.”

History of nuclear TPL insurance IIHistory of nuclear TPL insurance II

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Third PartyLiability

& Basic

PropertyDamage

1950s & 1960s

$70m

Gap Liability

Covers & Enhanced

PropertyDamage

Alternative LiabilityCovers,

Terrorism&

Business Interruption

1970s & 1980s 1990s & 2000s

$3bnCombined property & TPL insurance availableCombined property & TPL insurance available

TMI1979

Vandellos1986

History of nuclear TPL insurance IVHistory of nuclear TPL insurance IV

Paks2003

Convention principles & insurance IConvention principles & insurance I

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Convention principles & insurance IIConvention principles & insurance II

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• A financial limit of liability provides a A financial limit of liability provides a Maximum cost to the operator for any Maximum cost to the operator for any event.event.

TPL in non-convention countries: TPL in non-convention countries: United States IUnited States I

• 1957 Price-Anderson act (PAA) - “economic” channelling.1957 Price-Anderson act (PAA) - “economic” channelling.• 1975 - secondary layer of financial protection provided by 1975 - secondary layer of financial protection provided by

industry. Law currently extended to 2025; provides about $10bn.industry. Law currently extended to 2025; provides about $10bn.• Liability absolute when the regulator declares an Extraordinary Liability absolute when the regulator declares an Extraordinary

Nuclear Occurrence (ENO).Nuclear Occurrence (ENO).• Liability of licensee (operator) under PAA is generally strict, but Liability of licensee (operator) under PAA is generally strict, but

suppliers can be held liable too if suppliers can be held liable too if nono ENO. ENO. • TPL insurance limited to liability for bodily injury or offsite TPL insurance limited to liability for bodily injury or offsite

property damage. If property damage. If nono ENO, policy does not respond for ENO, policy does not respond for environmental cleanup.environmental cleanup.

• Limit of $300m Limit of $300m includesincludes costs & expenses; increased effective costs & expenses; increased effective 2010 to $375m2010 to $375m

• 2006 – Senate consented to ratification of CSC.2006 – Senate consented to ratification of CSC.• 2008 – Instrument of ratification deposited at IAEA2008 – Instrument of ratification deposited at IAEA

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TPL in non-convention countries: TPL in non-convention countries: United States IIUnited States II

US nuclear pool (ANI) & reinsurers

SECONDARY FINANCIAL PROTECTION SECONDARY FINANCIAL PROTECTION LAYERLAYER

$11.64 Billion$11.64 Billion

($111.9 Million x 104 Reactors)($111.9 Million x 104 Reactors)

Insurance Insurance Policy Limit:Policy Limit:

$375M$375M

Total: $12.015bnTotal: $12.015bn

“The Price Anderson Act – a law that subsidises nuclear power by creating liability protection for nuclear accidents”

““The legislation was intended first of all to bolster investor confidence, whereas victim compensation is secondary”

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TPL in non-convention countries: TPL in non-convention countries: JapanJapan

• 1961 law 148 (as amended) largely conforms with 1961 law 148 (as amended) largely conforms with Convention principles.Convention principles.

• Liability of operator is strict & is unlimited.Liability of operator is strict & is unlimited.• Financial security required up to $1,277m (Y120bn) – Financial security required up to $1,277m (Y120bn) –

as insurance, cash deposit or equivalent securities.as insurance, cash deposit or equivalent securities.• Government indemnifies operators for Government indemnifies operators for

earthquake/eruption events.earthquake/eruption events.• Insurance policy therefore excludes natural disasters, Insurance policy therefore excludes natural disasters,

but offers full required cover of $1,277m.but offers full required cover of $1,277m.

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Key conditions for TPL insuranceKey conditions for TPL insurance

Site technically acceptable &

regulatory control good

Convention &/or national nuclear law

acceptable

Domestic insurance industry strong &

capable of reinsurance

No exchange controls & currency strong

TPLTPL insurance insurance contract possiblecontract possible

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TPL indemnity limits ITPL indemnity limits IA selection (in $)A selection (in $)

Japan 1,350m Sweden 590m

U.K. 210m Switzerland 929m

S Africa 440m P.R.China 45m

U.S.A. 375m Canada 73m

Revised Paris amount is Revised Paris amount is €700m€700m ($ 945m) ($ 945m)Above amounts exclude costs/claims handling limits

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TPL indemnity limits IITPL indemnity limits II

• Current per site insurance provision up to about $1.35bn for TPL (excl terrorism) .

• Problems for insurers with capacity utilisation – capital needed to support highest limit.

• P.C. revision will improve this in some countries (OECD).

• Japan’s limit is about 30 times China’s.

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For which nuclear sites is TPL insurance For which nuclear sites is TPL insurance available?available?

All aspects of the nuclear fuel cycle

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Operator’s liability Operator’s liability Gaps in insurance coverGaps in insurance cover

• Currently:– Time limits: many regimes 30 years – insurance always 10

years.– Occurrence limits: some regimes per occurrence –

insurance aggregated to lifetime or at least annual.

• Revised Conventions:– As above +– Environmental damage or remote economic damage: new

heads of damage but maybe uninsurable…..

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Other types of liability insuranceOther types of liability insurance

• Radioactive contamination exclusion clause causes other insurance “gaps”:– Directors & Officers insurance,– Errors & Omissions insurance,– Employer’s liability in some countries,– Products liability insurance.

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A protocol was signed to revise the 1960 Paris Convention with the

objective of offering more financial compensation, to more people, for a

wider range of nuclear damages.UN/IAEA Vienna Convention was similarly

revised in1997.

February 12th 2004

OECD, Paris

OECD (regional) IAEA (global)

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Convention revisions IIConvention revisions II

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Convention revisions IIIConvention revisions III

Current1. loss of life, personal injury2. loss of or damage to property

Future4. reinstatement of impaired environment4. reinstatement of impaired environment 5. use or enjoyment of environment5. use or enjoyment of environment6. preventative measures 6. preventative measures

3. economic loss related to 1 and 2

insurableinsurable

concerns with regard to concerns with regard to fullfull insurability insurability

Concept of Nuclear Damage

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Existing insuranceMax $1.35bn

(more than required for revised Convention limit)

Newbio-

spherecover

30 years

TIMETIME

10 years

SCOPE OF COVERSCOPE OF COVER >>> environmental

$945m

AMOUNTAMOUNTOFOF

COVERCOVER

$0m

Convention revisions IVConvention revisions IVExtended time to make claim - 30 yrs

PC, BC, VCPC, BC, VC RPC, RVC, CSCRPC, RVC, CSCNuclear damageNuclear damage Property damage,

personal injury & loss of life

PLUS:PLUS: environmental & environmental & economic loss, economic loss, reinstatement costs, reinstatement costs, preventative measures costspreventative measures costs

Liability amountsLiability amounts Low minimum amounts Much higher amountsMuch higher amounts

Nuclear incidentNuclear incident Occurrence only PLUS:PLUS: grave & imminent grave & imminent threatthreat

Nuclear sitesNuclear sites Reactors, major fuel cycle, transport

PLUS: PLUS: Decommissioning & Decommissioning & waste disposalwaste disposal

Geographical scopeGeographical scope Contracting parties Non-contracting parties & Non-contracting parties & EEZEEZ

= less certainty?

= less certainty?

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Insurance concernsInsurance concerns

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1963 Vienna Convention Parties (72)

1960 Paris Convention Parties (126)

1997 CSC (108)

Non Party to Convention (134)

• Of c.440 reactors globally, 235 remain outside of the Conventions

• Within revised Conventions, greater reference to ‘competent courts’ & wider geographical scope may lead to more legal disharmony.

• Is CSC a big step towards a harmonised global system? But also has wider scope of damage: punitive damages too?

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Revisions = legal harmonisation?Revisions = legal harmonisation?

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2 units under 2 units under refurbishmentrefurbishment

Potential new buildPotential new build

DecommissioningDecommissioning

Bruce site: 6 reactors in operationBruce site: 6 reactors in operation

A -1 & 2A -1 & 2

B – 1 to 4B – 1 to 4

From DECCFrom DECC

Existing NPP Existing NPP (decomm after 2012)(decomm after 2012)

Possible new Possible new build sitebuild site

Wylfa, UKWylfa, UK

Liability for all 3Liability for all 3rdrd parties following accident: parties following accident: £140m now insured, above that Government; £140m now insured, above that Government; how long will it take to recover investment?how long will it take to recover investment?

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New build III: new liability obligationsNew build III: new liability obligations

1400

1200

1000

800

600

400

200

0

US$m

PRPRChinaChina

SwitzerlandSwitzerland USUS UKUK GermanyGermanyJapanJapan

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Nuclear liability£140m

Nuclear liabilityNuclear liability£600m£600m£140m£140m

NowNow New build - 2017New build - 2017

NPP asset valueNPP asset valueinsuranceinsuranceAbout £1bnAbout £1bn

NPP new buildNPP new buildasset valueasset valueinsuranceinsurance

More than £2.5bnMore than £2.5bn£1.14bn£1.14bn

£4bn +£4bn +

New build IV: capacity example UKNew build IV: capacity example UKDecomm. Liabs..

Maybe £1bnMaybe £1bn

• New build on adjacent property likely; exposure management.

• Construction work likely too: needs specific insurance.

• Project time vs. insurance market time restrictions.

• Impact of major work on neighbouring property:– e.g. Marcoule chimney

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Decommissioning I: planningDecommissioning I: planning

• Nuclear TPL to remain in force.• Risk remains of catastrophic off-site exposure.• Risks reduce over time.• Revised Convention limits will apply to

decommissioning sites• Moves to reduce Convention TPL limits for

late-stage decommissioning projects.• TPL for nuclear material storage.

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Decommissioning II: TPL arrangementsDecommissioning II: TPL arrangements

• Process of de-licensing. • Most legislation leaves insurers ‘on the hook’

for 10 years.• Government responsible thereafter.• Earlier sites worse: US experience.• What’s out there? • For the good of the industry, each case needs

defending; facts & science support this.

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Decommissioning III: TPL legaciesDecommissioning III: TPL legacies

3860

Transportation in the Nuclear Fuel Cycle Transportation in the Nuclear Fuel Cycle (arrows indicate transportation links)(arrows indicate transportation links)

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What is transported? What is transported?

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• Premium volumes vs. capacity required. • Identity of operator.• Process: CoFs.• No matter where TPL is purchased, the

insurers are the same.• Lower limit = quicker Government

involvement.• Greater likelihood of contentious claims under

Convention revision.

Insurance issues specific to transportInsurance issues specific to transport

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TPL insurers’ role following a severe TPL insurers’ role following a severe accidentaccident

• Insurers’ capital at risk:– Safeguarding of payment authority.

• Need for comprehensive infrastructure:– National & international – nuclear pools have cross

border agreements,– Immediate, long term & secure.

• Total claims handling “service” to ensure continuity & consistency with State payout.

• Important for victims & perhaps for politicians.

OperatorOperator

NuclearNuclearInsurersInsurers

PublicPublic GovernmentGovernment

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Risk management: retention & transferRisk management: retention & transfer

Risk management optionsRisk management options

RetainRetain ControlControlAvoidAvoid TransferTransfer

Industry mutuals

Private Private insurance insurance

marketmarket

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Why risk transfer insurance?Why risk transfer insurance? Stability of revenue & profit:

Risk transfer insurance provides independent emergency funding & reduces distress costs for insured,

Safeguards future investment, reduces volatility & associated costs,

Correlation between stable earnings & higher stock valuations.

Claims handling infrastructure & expertise. Price of risk – insurance cheaper than debt and

equity costs.Better for victims in the long termBetter for victims in the long term

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TPL insurance: a hidden subsidy?TPL insurance: a hidden subsidy?• Nuclear operators have STRICT, NO FAULT liability:

Such onerous liability is rare in industry.

• The private insurance market has been voluntarily insuring nuclear risks for nearly 50 years.

Example: U.K. law requires either insurance or 2 times limit in liquid, ring-fenced funds (about $460m today).

Options for operator: risk transfer insurance (cost: approx $2,000-$5,000/m); ring-fence $460m of assets (cost: opportunity cost); S460m line of credit from bank (cost: 3-4% over base rate of 1% - approx $18-20m).

Answer to question is: NO !Answer to question is: NO !

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Nuclear insurance vs. all insuranceNuclear insurance vs. all insurance

• Non-life global insurance premium:– 2007 $1,685,762,000,000– 2008 $1,779,316,000,000– Nuclear global premium: less than

0.04% of this.

• UK property/liability premium:– 2008 $107,393,000,000– nuclear premium less than 0.050% of

this.

• Other problems:– Consolidation.– No one likes nasty surprises.– Security & reinsurance.– Terrorism.

Nuclear TPL insuranceNuclear TPL insurance

RNIP presentation 10RNIP presentation 10thth March 2010 March 2010mark.tetley@nuclear-risk.com