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THIRD PARTY NUCLEAR LIABILITY INSURANCE – WILL THE INSURANCE MARKET BE ABLE TO COPE WITH THE PROPOSED CHANGES

About a year ago we published a blog about an EC study on nuclear liability and insurance; in that blog we commented on the reasons why this subject was of interest to the EC and gave a broad outline of the report’s content.

The EC has now published the study and although there has been a delay in it doing so, the subject remains topical simply because of the continuing inadequacy of the insurance provision when measured against the soon-to-be revised liability obligation of nuclear operators.

In this blog we will analyse why the insurance provision remains inadequate and in a future blog we will look at the recommendations the study makes to alleviate these deficiencies.

It is almost certain that the liability obligations of nuclear operators in OECD countries will expand materially on 1st January 2022 when the 2004 revision to the 1960 Paris Convention on nuclear liability is ratified. The old definition of nuclear damage will be widened from just property damage and bodily injury to include economic, environmental and preventive measure damages; critically it will also offer the ability for potential claimants to bring a bodily injury claim up to 30 years after the causal incident (the existing period is generally only 10 years). The financial security amount (i.e. the amount the nuclear operators must provide and cover with insurance or some other financial guarantee) will rise to between €700 million and €1,200 million; the existing financial security in the UK is a mere £140 million.

The insurance market can easily cover the existing liability obligations in full – for the full amount, full period and full scope, but at present this will not be the case for the new regime next year – why not?

The study identifies the major blocks on providing this revised liability insurance for nuclear sites as:

  • Ambiguity of language – the Convention’s new, wider scope of cover is less definitively worded than the limited existing cover; for example under one of the new heads of damage operators are liable forcosts of measures of reinstatement of impaired environment but it is not easy for insurers to make provision for exactly how much reinstatement may be required.
  • Volatility – insurers need to make provision for future claims arising under policies underwritten today. The extension of the time to bring a claim for nuclear damage from 10 to 30 years materially increases volatility of outcome for insurers as predicting losses so far into the future becomes guesswork; therefore insurers must allocate disproportionate reserves for such events to cater for unexpected losses.
  • Judicial inflation – insurers are nervous that judicial decisions for claims made decades ahead may be driven by different social and medical values, so increasing the value of claims substantially. This further complicates today’s provision for future liability claims.
  • Other factors such as relatively poor perception of the nuclear sector, the lack of actuarial loss data (there have been very few nuclear insurance losses) and uncompetitive returns on capital have disincentivised insurers from entering the nuclear insurance market, thus restricting innovation and any broadening of the market.
  • Small size of nuclear insurance market – insurance of nuclear risks is mostly provided by nuclear insurance pools; these are national groups containing many insurers in an individual specialist insurance entity that provides cover for most nuclear sites globally. Given that normally competing insurers are grouped into a single entity (a pool), it is axiomatic that these pools are not subject to the normal cut-throat competition seen elsewhere in the insurance sector and this too has limited the development of a fully competitive insurance market for nuclear.

All these factors have challenged the insurers of nuclear liability to provide the required cover for the forthcoming liability Convention revisions. At present the insurers can offer enough financial limit to cover the revised financial security amounts but cannot offer the full scope of the revised nuclear liability language.

As with any market the insurance availability situation is fluid, but it remains unlikely that the full scope of cover will be available for the full amount of €1.2billion in time for next year.

In the next blog we will look at the recommendations the EC study makes to alleviate this situation.

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.

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