A new approach to risk management in nuclear energy

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 of Nuclear

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 in Insurance

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

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.