Notwithstanding the Fukushima incident in Japan, the development of nuclear power is continuing worldwide, with plans for new units to be constructed in China, Finland, India, Jordan, Turkey, and the United Arab Emirates. New facility studies are progressing in other nations as well. Nuclear energy is seen as a preferred option in emerging markets to meet forecasted electricity demand as well as a means of significantly reducing greenhouse gas emissions in more-developed markets, particularly in China and eastern Europe. In the Middle East, nuclear power also performs the dual functions of generating electricity and providing fresh water through desalination plants.
In addition to power generation, nuclear isotopes manufactured in hot cell operations support a myriad of other applications, such as nuclear pharmaceuticals, agriculture, welding, drilling, other industrial activities, and education. One could go so far as to say that the use of isotopes is the largest growing sector of nuclear materials.
Therefore, regardless of the slowdown of the “nuclear renaissance” in OECD (Organization for Economic Cooperation and Development) countries following the incident at Fukushima, nuclear power still plays a vital role in the global economy.
Most insurance professionals are completely unfamiliar with nuclear risks. Typically, their knowledge is restricted to the nuclear exclusions that exist in so many different types of personal and commercial property policies. Although nuclear insurance is definitely a niche market, insurance professionals should always seek opportunities to learn about the various businesses served by the insurance sector.
When the topic of nuclear insurance comes up in conversation, most people shrug their shoulders; nuclear is a niche market that few come across in their day-to-day activities. Others assume that nuclear risks go into the black box known as the pools. Jardine Lloyd Thompson’s (JLT’s) Global Nuclear Practice Group (GNPG) consists of experts in this niche market, and the goal of this article is to shed some light on nuclear insurance and this black box.
To start, let’s explain the key market for nuclear risks—the pools. The International Nuclear Pools were formed in the 1950s and 1960s following the push by many governments to find peaceful commercial uses of nuclear power. Because of the low-frequency/high-intensity nature of nuclear events, as well as the financial security requirements imposed by the international conventions, no insurers were willing to provide this capacity on their own. Thus, the nuclear pooling system was born.
Nuclear pools are, in general, underwriting associations that manage the insurance capacity provided by numerous local member insurers to cover nuclear-related risks—they are not insurance companies in and of themselves. The combined strength of the members supports the ability to pay high-intensity claims. Premiums paid to the nuclear pool are spread to the various pool members after the deduction of underwriting and claims expenses based on their level of participation.
Regardless of the strength of local insurers in an individual country’s nuclear pool, the combined capacity is insufficient to cover all nuclear exposures. Therefore, the nuclear pools reinsure each other in order to increase their individual capacities.
Each of the individual nuclear pools is tied together into a single international nuclear pooling structure with worldwide capacity. More than twenty domestic nuclear pools exist around the world, mostly concentrated in countries with robust and developed nuclear industries. The largest of the nuclear pools is Nuclear Risk Insurers, Ltd. (NRI), the British Nuclear Pool. Other major nuclear pools include Assuratome (French Nuclear Pool), DKVG (German Nuclear Pool), the Swiss Pool, the Japanese Pool, the Nordic Pool (Sweden and Finland combined), and the Chinese Pool.
The primary benefit of this structure is that the individual nuclear pools can provide extremely large amounts of capacity exclusively for nuclear risks, because the pools reinsure each other and share their domestic capacity with the global market.
This structure also allows local insurers to access premium income for worldwide risks as well as act as conduits for entry of nuclear insurance capacity into countries where nonadmitted status is prohibited. The nuclear pools function as access points to the global nuclear capacity available in the overall marketplace.
The disadvantage of working with the nuclear pooling system is that it is a monopolistic structure. Because the nuclear pools reinsure each other, they are, therefore, partners and do not compete against each other—a concept the pools refer to as “pool solidarity.” In addition, conventional commercial insurers and reinsurers are unwilling to provide capacity for nuclear risks, either because of reinsurance treaties or because they already allocate their net nuclear capacity to the pools, which specialize in writing these risks.
The commercial insurers are therefore partners of the nuclear pools and are not willing to compete, essentially, against themselves. In most situations, the local pool sets the terms and conditions of the local nuclear insurance policy, and the insured has very little room to negotiate.
Over time, mutual insurers were formed by nuclear utilities seeking to avoid the monopolistic practices of the nuclear pools. Nuclear Electric Insurance Limited (NEIL) is the largest of the nuclear mutuals, providing Nuclear Property coverage for the entire U.S. nuclear industry (Nuclear Liability is provided exclusively by the American Nuclear Pool, ANI). NEIL has a sister company based in Ireland called Overseas NEIL Limited, or ONEIL.
Other nuclear mutual insurers include EMANI (Nuclear Property), ELINI (Nuclear Liability), BlueRe (Nuclear Liability), and NIRA (Nuclear Property and Liability). Aside from NEIL, which provides capacity only to nuclear generation utilities in the U.S., the capacity of nuclear industry mutuals tends to be insufficient to fully support a nuclear insurance program, and most involvement is on an excess or a quota share basis—although EMANI has recently been challenging this role.
Recently, conventional commercial insurers outside the nuclear pools have taken an interest in nuclear risks. If a nuclear pool is not initially involved and no conflict of interest exists, certain commercial insurers have demonstrated a willingness to provide capacity at higher, excess levels.
The comfort level of commercial insurers will likely increase over time, as nuclear power becomes a preferred option for power generation worldwide. Specifically, many large reinsurers have become highly interested in the “nuclear revival,” and it is quite possible that they may compete with the nuclear pools for the Construction All-Risk (CAR) cover, even post-fuel arrival when the risk becomes truly nuclear. These large commercial reinsurers possess the technical know-how regarding the placement of coverage for complex engineering projects, often more so than the nuclear pools.
Using the jurisprudence of the most recent reactor construction projects in Europe, it was the commercial markets that cooperated to provide the nuclear cover—particularly for the EPC (Engineering, Procurement, and Construction) contractor—and not the nuclear pools.
Capacity is not really a concern, because by using any one of the nuclear pools, one taps into the global nuclear capacity, estimated to be between 2 billion and 3 billion euros. Obviously, access to this capacity is easier through one of the larger pools, as they will have a greater ability to attract capacity through reinsurance (and dictate coverage terms) because of the size and strength of their own capacity in the global structure.
The key difference between the nuclear insurance market and the conventional insurance market is the level of competition. As stated earlier, the nuclear pools are monopolistic, and because they do not compete with one another, once an insured chooses a nuclear pool, that insured is tied to that pool indefinitely.
If an insured is unsatisfied with conditions imposed by one pool, it cannot go to another pool for cover because the other pool will not compete with its reinsurance partner under the principle of pool solidarity, and the other pool probably already participates in the program through reinsurance and is quite happy with the poor conditions under the current policy. Because the pools are the only major source of capacity for nuclear risks (outside the nuclear mutuals), this lack of competition further reduces the options available in the marketplace.
Another difference between the two markets is that nuclear insurance is typically written on an annual basis and on a manuscript form. Some pools have standardized forms and rating structures, but this is rare. While conventional insurers can write complex construction projects extending over several years, for example, and wording is generally well established, nuclear insurance is renewable annually, with terms and conditions able to change from year to year.
The nuclear insurance market is generally skewed toward supporting owners/operators of nuclear facilities and not EPC contractors/suppliers. Owners/operators subscribe the lion’s share of the market’s capacity and are the primary customers of the pools. For major contract works projects, the capacity of the pools will support the owner-controlled insurance program. If the contractual risk allocation places any of the nuclear risks under the responsibility of the contractor/supplier (which has recently become a growing trend), coverage for these risks can be found only through the nuclear insurance market—again, primarily the pools (although some alternatives are emerging).
Another potential situation is that the owner-controlled program is not sufficient to cover the contractor’s risks, and the contractor is required to seek Difference in Conditions (DIC) coverage. However, the pools generally will not write coverage for contractors for the same risk because of potential accumulation factors. Thus, contractors are forced to seek coverage in the conventional market, the nuclear capacity of which is limited at best and rather expensive.
Recent solutions have been developed for these issues, although the market still tends to be limited.
How have the nuclear pools responded to the major incidents that affected the nuclear industry?
- Three Mile Island—Although it was determined after the fact that, effectively, no radioactivity or contamination was released to the environment, American Nuclear Insurers (the United States Nuclear Pool) responded immediately, providing indemnification directly to the public and local municipalities in the area. The pool also defended numerous contested claims; the incident occurred in 1979, and the final claims were closed in 2004, twenty-five years later. Significantly more was spent on claims defense than on indemnification.
- Chernobyl—This site was not insured and was completely covered by government indemnity (at the time, the government of the USSR).
- Fukushima—Nuclear Property and Liability coverage for the sites owned by TEPCO, a Japanese electric utility, was provided by the Japanese Pool and was heavily reinsured by the other global pools. However, coverage was denied after the catastrophic event, as earthquakes and tsunamis were specifically excluded in both policies. No indemnity was provided via insurance.
For more information, please contact Ian Maciulis at Ian.Maciulis@s2hgroup.com.
Many thanks to the International Insurance Interest Group for its contributions to this article.
This article was featured in the Spring 2016 issue of Insights, the professional journal of the CPCU Society.