Insurers can help improve the image of nuclear

16 September 2014

Third party financial limits have not kept pace with the development of either the insurance sector or the nuclear industry, says Mark Tetley, managing director of the power, nuclear and construction division at Lloyd's broker Price Forbes.

This fact "provides a point of criticism" against the nuclear power sector, namely that it receives a "sort of secret subsidy" when paying for accidents, Tetley said at the World Nuclear Association's 2014 Symposium in London.

"It is my belief that insurers could do more. We could provide cost effective, materially higher financial support for the nuclear industry, reducing the burden of accident costs that currently falls to governments and taxpayers, and thus improving the industry's image," he said.

Nuclear sites generally have two types of insurance - one for the plant, buildings and revenue stream owned by the operator and another for the third party liability obligation operators have to the surrounding population should an accident occur. This latter coverage is governed by international treaties that were drawn up when the insurance market was much younger and the nuclear industry was in its infancy, he said. A key provision of these treaties is limitation of the nuclear operator's liability to third parties for radiation damage.

"National legislation carried the key principles of these treaties into local laws and this system survives to this day," he said. "However, both our industries have grown up since then. The nuclear industry now provides about 11% of all electrical generation in the world and the assets of the non-life insurance market have grown to trillions of dollars."

The Price Anderson Act - the federal nuclear legislation in the USA that limits third party liability - alone provides a reasonable amount of compensation for nuclear accident victims, albeit largely provided through the resources of the nuclear operators, who may struggle to meet their obligations following a serious accident, Tetley said.

"The Nuclear Energy Institute says the Act 'provides effective liability insurance at no cost to the public'. But is the $13.6 billion amount available in this regime really enough?" he said.

Japanese utility Tepco details on its website the compensation amounts paid out to those affected by the Fukushima Daiichi accident.

"Regardless of whether one feels all these payouts are justified, the amount paid to date is about $40 billion. The economic cost of the much more serious Chernobyl accident is estimated at between $80 billion and $100 billion," Tetley said. "In the context of these two accidents, the US amount available to meet these claims is insufficient, with only $375 million of the $13 billion provided by proper risk transfer insurance - and it is the largest amount globally. Instead, the cost of severe accidents is falling to governments and taxpayers."


Today, insurers still struggle with a number of issues that prevent sufficient higher financial amounts being provided. One of these issues is the link between the financial amount and what by law it must be provided for - currently the international treaties are implementing a wider definition of nuclear damage for which compensation is payable, including a 30-year period (for bodily injury) during which a compensation claim must be considered.

"This duration of liability is uninsurable at present and is restricting insurer involvement for liability insurance," Tetley said.

Another issue that is putting off insurers is the variation between the financial amounts in different countries, he said. "The current financial compensation limit for Belgium - $1.608 million - is about 35 times that of China - $45 million - yet insurers have to support all their commitments with capital. The wide range of amounts and limited utilization of the maximum capital requirement makes the provision of nuclear insurance relatively uncommercial when compared with other classes of insurance."

Opponents of nuclear power claim that this arrangement is "the mother of all subsidies" for the nuclear industry, he said.

"It seems that the public expects sectors perceived as hazardous to accept a much greater internalization of costs than other less invasive industries - simply because of a poor perception," he said. "Much greater levels of internalization can be achieved for the nuclear industry at a reasonable cost to energy users, if the insurance market capacity and expertise were better utilized."

Insurers could provide an "unrivalled claims management system" that would deal with all nuclear accident claims over a substantial period of time, he said.

"Already in a number of countries, insurers and the nuclear operators have worked together to provide comprehensive post-accident claims systems, thus freeing up operators to focus on site stabilization and decontamination," he said.

Greater insurance market involvement could also bring independent risk management, technical expertise and best practice based on its experience of 60 years of technical assessment of the operation of nuclear sites, he said.

Large losses that the insurance market has paid out in recent years include $72 billion after Hurricane Katrina in 2005 and $35 billion after the Tohuka earthquake and tsunami – excluding the Fukushima Daiichi accident – in 2011.

"A payment for a non-nuclear claim of the magnitude of Fukushima can easily be met by insurance, yet the financial obligations placed upon nuclear sites are much lower than these amounts," he said. "Therefore, transferring the nuclear accident risk at its true scale to the insurance market is entirely feasible and well within the financial capability of the global market; it just needs some new thinking to enable this capacity to be utilized."

Possible model

A possible model for the future - and one that has been discussed recently by the European Commission in recognition of the inadequacy of current financial security compensation limits when measured against likely nuclear accident claims – could permit a $20 billion financial contribution from a number of sources.

These sources are: the industry through self-insurance, as currently provided for in the USA; the current wide scope of cover provided by specialist insurance pools and mutuals; and a whole new sector of the insurance market that currently will not get involved because of the difficulties relating to the nuclear damage definition and prescription periods.

"The key feature of the model is that it provides much greater financial compensation for accidents from private sources, so relieving taxpayers," Tetley said.

Accessing these markets would require "simple triggers", he said, that would initiate payment only in the event of a serious accident. A trigger could be a level above 5 on the International Nuclear and Radiological Event Scale, or measured radiation of certain levels at strategic points around the accident site.

"Whatever the trigger used, its purpose would be to ensure sufficient unambiguity to allow so called 'catastrophe' insurers and reinsurers to commit capital to a large nuclear accident," he said.

Provision of the higher financial security would not need to be available for each site. In the 15,000 operating years of nuclear power, only two such accidents have occurred, therefore insurers would be able to limit their involvement to one or two events. Ideally, cover would be obligatory across the industry, thus providing for sufficient premium to justify insurance market capital commitment.

Risk transfer insurance provides distress funding to businesses for unexpected events by protecting company balance sheets from shock losses and permits management to focus on dealing with the accident consequences.

"This new model for financial security would therefore allow nuclear operators to concentrate on stabilizing the site, rather than on dealing with compensation claims or worrying about post-loss refinancing," he said.

"For a small premium amounting to tenths of cents per kilowatt hour, the provision of substantially greater financial security limits is possible in a cost effective way," he said. "And with new generation technology and the passage of time, the premium costs would reduce."

Researched and written
by World Nuclear News