This blog is the final of three on the EC’s study on nuclear third party liability and insurance; previously we have written about the need for the study [1] and, once the report was published late last year, we covered the current difficulties the insurance market is having with some of the revisions to the nuclear liability Conventions [2]. In this blog we look at the recommendations the study makes to alleviate these problems.
With an understanding of the major constraints on insurance provision for the full scope of the revised nuclear liability Conventions, the EC study team identified 14 options that could increase the amount of insurance available (‘capacity’). Some of these options were immediately identified as unrealistic; for example, amending the liability Conventions is unlikely in the short term. Instead the study focused on what could be achieved within the framework of the existing/revised liability Conventions and was conceivably within the power of the EC to implement across all EU member states.
Out of the original 14 options, the 5 options that the study reviewed in detail and recommended were:
- Allow funds to accumulate to cover the 1st tier of the required liability Convention financial security amount: this arrangement is used in the USA where sufficient premium has built up to allow the required $450 million of financial security for nuclear liability to be fully funded twice over. This allows operators to receive premium rebates and allows insurers to consider their nuclear exposure as more of a catastrophic risk – this alters the modelling on their return on capital and allows them to commit higher capacity.
- All nuclear liability policies to have single, lifetime limits: some nuclear liability policies limit insurers’ monetary exposure to once in the lifetime of each site; others offer a new policy amount each year. These latter policies will ‘stack’ with each passing year, increasing materially the insurers legacy exposure. The insurance market discovered during the asbestosis crisis that this practice is dangerous, as claimants can claim for each policy year they consider exposure may have occurred. The difference in policy type is purely an illustration of national insurance practice and the nuclear Conventions do not explicitly favour one type over the other; therefore harmonisation is possible. The nuclear liability capacity offering will increase in those countries that removed stacking annual policy limits.
- Increase nuclear insurance mutual participation with new mechanisms for reinsurance: the nuclear insurance market’s principal competitor is the nuclear industry owned mutual insurers; if these mutuals could offer more insurance (this being backed by reinsurance), then greater capacity could be achieved. New innovative reinsurance mechanisms and new markets (such as the capital markets) could be accessed to increase capacity from the mutuals. Equally, over time, the traditional insurance markets could also develop this way.
- Mandate a nuclear catastrophe only, EU wide, single event insurance cover to provide funds excess of the current legal regimes: all the liability Conventions mandate the holding of financial security for nuclear liability compensation up to a fixed amount. There is nothing to prevent governments or the EC mandating nuclear site operators buy a separate amount of insurance excess of this; this could be achieved using triggers, identified in the report, to activate this cover. If the use of activating triggers was introduced, significantly more capacity would be available from both the capital and traditional insurance markets. The EC would need to mandate purchase of this new insurance for all EU nuclear operators, but limiting the insurance to a single ‘catastrophic’ event would soften the premium cost, yet offer significant relief to governments (and taxpayers) who are otherwise largely on the hook for such events.
- Establish an EU wide Protection Gap Entity: the current pandemic has revived interest in Protection Gap Entities [3]. These are entities that will manage catastrophic exposure, perhaps originating from multiple sources (e.g. weather, nuclear event, pandemic or earthquake) to optimise financial protection amongst all stakeholders. In the nuclear sector, this would include governments, insurers, capital markets and operators; sub-dividing and allocating nuclear liability exposure to those most suited would allow material increases in available capacity. For example gradually occurring environmental damage and longevity exposure could be retained within the nuclear industry with tax benefits available to allow the accumulation of funds to support any claims. Cover for only catastrophic nuclear events (similar to Chernobyl and Fukushima) could be allocated to insurers and capital markets; with only catastrophic exposure, higher financial amounts would be offered than today, as nervousness of gradual exposure or longevity risk deters many insurers. Governments could step in to provide high level loss funding, but in partnership with more risk averse capital market players. Such a mechanism would be better suited to a multinational body such as the EC and the mechanism could be used to cover any exposure with systemic loss implications.
It remains to be seen whether the EC implements any of the recommendations or acts upon any of the study content [4]. Achieving a cost-effective higher amount of private financial market contribution to a future catastrophic nuclear event is within the grasp of those willing to confront the difficulties identified in the study; such an outcome could be an opportunity for the nuclear industry, the financial services sector and governments.
Prospect Law was closely involved in the preparation of this study for the EC; for those interested in understanding any aspect of the study in more detail, please get in touch.
[3] For more detail and explanation of these entities, see: PGE-Report-FINAL.pdf (city.ac.uk)
[4] The full, published EC study can be found here: Study on the insurance, private and financial markets in the field of nuclear third party liability – Publications Office of the EU (europa.eu)
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