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FOSSIL FUELS: THE POSSIBLE IMPACT OF REDUCED INSURANCE COVERAGE

Growing Opposition

In September 2016 a Lutheran pastor in America’s Washington state led a blockade of a train of oil tankers; he and other members of ‘Veterans for Peace’ were repeating a similar blockade earlier in 2016 of a coal train by ‘Raging Grannies’.

These events could easily be dismissed as the actions of a minority of climate cranks, but that would be foolish. Since 2016, these anti fossil fuel protests have become increasingly mainstream, and the insurance market has witnessed growing and successful pressure intended to shame insurers into refusing to insure the coal industry.

The protestors no doubt feel added legitimacy for this pressure, since the publication of the IPCC’s October 2018 report that calls for urgent action within the next 12 years to keep global warming to 1.5oC, and, even more recently, the EBRD’s announcement that it too will no longer fund coal and oil projects.

Non-Governmental Organisations

Whatever one feels about the climate change debate, the pressure on the insurance market and wider financial services sector has been successful. One NGO, Unfriend Coal, is leading a campaign to render the coal industry uninsurable. Moreover, 2018 has seen large insurance businesses such as Allianz, Aviva, Scor, Swiss Re and Lloyd’s of London, scale back their coal industry involvement, largely in response to this campaign.

Unfriend Coal’s ultimate objective is to starve coal of finance, by denying the investors the security of insurance. However, as the CEO of Swiss Re said back in July: “it’s not simple…if you stopped financing and insuring it tomorrow it would be a disaster for society”.

Unfriend Coal is certainly right about one thing: the insurance sector is right at the centre of this debate. On the one hand insurers bear the brunt of the increasing scale of natural catastrophe losses, howsoever caused, and they fund numerous research projects into this subject and into climate change.

Impact on Less Developed Countries

On the other hand, insurance is an essential component in any finance arrangement for a project. Insurers have an obligation to be responsible players in society, by underwriting investment projects that will help improve living standards for the two-thirds of humanity who live in less developed nations.

These may be coal fired power projects because basic energy provision is often the first step towards unlocking greater prosperity. It’s not a perfect world and the insurance sector must serve the world as it is as today, as well as try to respond to those who want change for tomorrow. Coal mining and power generation will likely play an increasing role in South East Asia and Latin America in the coming decade, even as some developed nations reduce or even stop fossil fuel use.

Nevertheless, there is still disunity amongst OECD countries. Australia and the United States are politically supportive of coal and consequently there have been no insurers there reducing their exposure to the coal industry.

Conclusion

So, what to do? Follow the money and keep insuring risks that are unfashionable and unpopular, or stop insuring sectors that have been fingered as climate changing by a prosperous first world minority that perhaps watches too much TV.  This dilemma is an uncomfortable one for a sector that isn’t really used to the limelight and just normally gets on with the job of mitigating the risks facing so much of today’s human endeavour.

Fossil fuels are ‘dirty’, and most would agree we can’t just blindly continue polluting the world as we have done in the past, but insurers need to take a step away from the ideology and remember that the priority surely is to continue lifting as many as possible out of poverty, by supporting infrastructure investment.

This implies judging each project on its merits. It means taking the foot off the throttle, but not jamming on the brakes. For the sake of human progress, insurance needs to play its part in unlocking good investment projects of all types that could reduce poverty for millions more, rather than turn its back on whole sectors of economic activity.

About the Author

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here

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INSURANCE AND THE NUCLEAR INDUSTRY: AN ANALYSIS BY MARK TETLEY

Mark Vickers recently posted an article on risk management for new nuclear in the UK, highlighting the high-risk environment of new nuclear build (and other major infrastructure projects) that characterises these projects as ‘VUCA’ (volatile, uncertain, complex and ambiguous).

Whilst recognising that insurance has a role to play in risk management, in this article Mark Tetley calls for a more holistic, all-encompassing approach to risk management to account for newer, societal risks as well as the more traditional exposures.

Traditional Position

The insurance market has been a solid provider of traditional risk mitigation for the nuclear industry for the last 60 years, yet there remains a commonly held misconception that nuclear sites are uninsurable, with the assumption that the severe cost of nuclear accidents fall on the taxpayer.

Bespoke insurance arrangements have been developed, alongside liability regimes, to balance the benefits of nuclear science (e.g. low carbon base-load energy and medicine), with financial support to mitigate the costs of nuclear damage.

These insurance policies are like those demanded of most car owners – compulsory policies that provide cover for radiation damage caused to off-site third-party victims of accidents (i.e. you and I). In addition, nuclear sites can purchase insurances that cover the costs of repairing the damaged plant, decontaminating the site following a severe incident and, in some cases, protecting the revenue stream.  Indeed, insurance is available to such an extent that today almost all nuclear sites in the world are insured to some degree.

Recent Developments

Yet, with new types of risks and ever-increasing financial exposure, the insurance market cannot stand still; it must continue to develop products and capacity to ensure it remains a key part of any complex risk management strategy, including greater cover for obligatory liability and cyber exposures.

Today, one of the criticisms of nuclear sites is the amount of insurance or financial security the nuclear site operators must buy to fulfil their statutory obligations. Fukushima is illustrative of this concern: at the beginning of September 2018, the amount of compensation paid out to victims, such as those evacuated, suffering traumas or whose businesses were affected as a result of the accident reached ¥ 8.34 trillion (c. US $75 billion), yet the statutory liability insurance required of TEPCO for victims at the time of the accident was a mere ¥120 billion (c. US $1.1bn).

The difference between these two amounts will ultimately be borne by TEPCO and the other nuclear operators in Japan, but inevitably some of the cost will fall upon the taxpayer.

Possible Reform

Could the insurance market do more to ensure such large gaps in cover are reduced in the future? After all, in 2017 insurers paid out over US $100bn in claims for just for three US landfall hurricanes (Harvey, Irma and Maria) without a murmur. BP’s Deepwater Horizon will probably cost about US $70bn, some of which was insured. The global non-life insurance market premium in 2017 was about US $2,234 trillion; this provides a strong base from which to pay claims and logically it would seem that the insurance market could provide more cover than the c. US $1.5 billion currently available for big nuclear accidents, given it already manages to do so for other events.

Closing this gap between the possible cost of a nuclear accident and the current financial security requirement for nuclear sites is now the subject of more study; for example, we are advising the EC in its work in looking closely at future options to manage this gap without destroying the balance between victims’ needs and the commercial future of what is still our largest provider of base load low carbon energy.

We must not forget that insurance was created to assist with the management of volatility, uncertainty, complexity and to some extent ambiguity; in today’s rapidly evolving risk environment the insurance industry and wider financial services community have a tremendous opportunity to create new products to cover these greater exposures and new risks. We must rise to this challenge and do our bit to ensure the success of current and future complex infrastructure projects.

About the Author

Prospect Law is a multi-disciplinary practice with specialist expertise in the energy and environmental sectors with particular experience in the low carbon energy sector. The firm is made up of lawyers, engineers, surveyors and finance experts.

Mark Tetley has wide experience gained from senior positions across the London insurance market as  both an underwriter  and a broker , in a variety of sectors. He provides advice and assistance on a wide range of insurance and risk issues, including comprehensive nuclear liability and property insurance assistance, complex infrastructure project programme design and review, claims and policy reviews, assistance with project insurance design and implementation in developing countries, and many other aspects of risk mitigation.

This article remains the copyright property of Prospect Law Ltd and Prospect Advisory Ltd and neither the article nor any part of it may be published or copied without the prior written permission of the directors of Prospect Law and Prospect Advisory.

This article is not intended to constitute legal or other professional advice and it should not be relied on in any way.

For more information or assistance with a particular query, please in the first instance contact Adam Mikula on 020 7947 5354 or by email on adm@prospectlaw.co.uk.

For a PDF of this blog click here