Memorandum submitted by Nuclear Risk Insurers
Ltd
INFORMATION ABOUT
NUCLEAR RISK
INSURERS LTD
(NRI)
NRI is a FSA authorised insurance intermediary
that acts as the UK insurance market's underwriting agent for
all matters of nuclear insurance. It operates as a limited company
and has a membership consisting of over 20 leading UK market property
and casualty insurers from both Lloyd's and the general market,
who pool their insurance capacity for nuclear risks into NRI;
it is therefore commonly known as the British nuclear insurance
pool. NRI then uses this capacity both to insure the nuclear sites
in the UK and reciprocally to reinsure other nuclear sites around
the world in association with similar entities internationally.
NRI today represents the largest single block
of risk transfer insurance capacity in the world, at around £400
million ($700 million) and is also one of the oldest nuclear insurance
entities in the world (founded in 1956).
Key questions posed by the enquiry of relevance
to insurers
— What are the hidden costs (ie subsidies)
associated with new build?
— How much Government financial support
would be required to facilitate private sector investment in nuclear
new build? How would such support be provided? How compatible
is such support with liberalized energy markets?
— If nuclear new build required Government
support on what basis would such support be justified?
— Is nuclear new build compatible with
Government aims on security and terrorism within the UK and internationally?
KEY POINTS
AND RECOMMENDATIONS
OF THIS
SUBMISSION
Benefits of the international nuclear insurance
market to public safety and to Government:
— Key advantages of insurers' pooling
arrangements for the nuclear sector are the ability to retain
a highly specialised technical ability, a comprehensive private
sector post-catastrophe compensation infrastructure and a sound
understanding of the special nuclear liability regimes and associated
insurance products.
— Today, insurers provide about 70%
of the world's nuclear site operators with both on site physical
damage and financial loss insurance as well as the total amount
of statutorily required off-site third party liability insurance.
— There is a strong argument, both
from a political and safety perspective, which says that external
scrutiny of nuclear operators by the private sector insurance
market is a valuable addition to the overarching desire to optimise
public safety.
Role of Government and the Question of Subsidy:
— Private sector insurance has provided
the full liability and physical damage insurance requirements
for the majority of nuclear plant over the past 50 years.
— International liability Conventions
make the nuclear operator's liability strict and absolute and
the obligation to honour "no fault" compensation is
required, currently up to a financial limit per site of £140
million in the UK.
— Insurers have, since 2002, secured
the help of Government in meeting the terrorism risk through a
partial (and reducing) indemnity.
— In the future, the private sector
will be able to provide the majority of the foreseeable expanded
financial compensation requirements for a revitalised nuclear
sector; the revised financial limits will be £480 million
once ratification of the revised Convention occurs.
RECOMMENDATIONS
1. It is recommended that Government recognises
the uninsurability of the prospective revision to the nuclear
operator's statutory obligations with regard to environmental
damage restitution and remote economic damage. (Section 3)
2. It is recommended that Government therefore
assumes in full or at least defers imposing the ambiguous responsibilities
from nuclear operators until the private financial markets are
able to quantify some of the risks presented by the revised scope
of the Conventions. (Section 3)
3. It is recommended that the existing 10
year time limitation for the insurance of nuclear liability is
retained. (Section 3)
4. It is recommended that revised arrangements
whereby Government would assume the statutory liability obligations
of nuclear operators only following multiple terrorist attacks
within a finite and defined period. (Section 4)
These recommendations are made to help ensure
the continued involvement of the international private insurance
market in the UK nuclear sector, thereby allowing the transfer
of the majority of risk away from Government and nuclear operators
for both existing and new nuclear sites.
SUBMISSION DETAIL
1. Benefits of the international nuclear
insurance market to public safety and to Government
1.1 Private sector nuclear insurance began
with the advent of civil atomic power in the UK in the 1950s.
The insurance market's capacity was pooled because of the realisation
that the then new nuclear industry required special insurance
arrangements on account of the remote possibility of a catastrophic
accident at a nuclear plant causing widespread off-site nuclear
damage. Similar pooling arrangements have also been applied in
many countries to other industrial risks and to natural perils
such as flood.
1.2 Since the 1950s, the nuclear insurance
pools have developed into centres of excellence for the understanding
of nuclear risk. Key advantages of insurers pooling arrangements
for the nuclear sector are the ability to retain a highly specialised
technical ability, a comprehensive private sector post-catastrophe
compensation infrastructure and a sound understanding of the special
nuclear liability regimes and associated insurance products.
1.3 In the early days of the nuclear industry,
Government lawmakers, nuclear operators and insurers worked together
to draft a specific liability framework for the nuclear industry.
This work ultimately lead to the creation of the "International
Nuclear Conventions" which shape most national nuclear liability
laws and impose strict, absolute but limited liability on the
nuclear site operator with a simultaneous requirement for site
operators to have in place ring-fenced funds for compensation
following a nuclear accident at the site. In general, insurance
is the most popular and cost effective method of meeting this
financial compensation funding requirement.
International Nuclear Conventions:
There are two Major Conventions—the OECD's 1960 Paris
Convention, amended in 2004 and the UN's 1963 Vienna Convention,
amended in 1997. Both provide the comprehensive compensation regimes
for nuclear sites in the signatory states and both require financial
instruments (normally insurance) to meet the compensation funding
requirements.
1.4 Insurers meanwhile introduced nuclear
damage exclusion clauses on all non-life insurance policies (eg
motor or home owners insurance), so that all insurance capacity
could be focused, through the national nuclear insurance pool,
on the nuclear site operator's liability insurance. In this way,
site operators can meet their legally imposed financial funding
requirements through insurance and reinsurance, whilst insurers
have a method of controlling exposure to a nuclear catastrophe.
Without such a mechanism, insurers would not be able to offer
insurance to nuclear operators because of the unknown extent of
any nuclear catastrophe.
Insurance: when an insurer
assumes the risk of loss from an individual or business for a
premium.
Reinsurance: when an insurer
seeks to insure some of his assumed risk portfolio to another
insurer.
1.5 The ability to clearly quantify and
control exposure has always been a vital requirement in the assessment
of insurability and the nuclear liability Conventions embody both
financial and temporal limits for a catastrophic nuclear accident.
Currently the financial compensation limit provided per site in
the UK is £140 million and the temporal limit is 10 years;
both these limits are fully provided by the private insurance
market.
1.6 Today, insurers provide about 70% of
the world's nuclear site operators with both on site physical
damage and financial loss insurance as well as the total amount
of statutorily required off-site third party liability insurance.
However, insurers' appetite for nuclear risk in their portfolio
is limited, because of the low number of nuclear sites worldwide
(about 500) and the consequent low premium volume which causes
difficulties in attracting capacity to the sector.
1.7 Insurers perform regular insurance surveys
on nuclear plant and good maintenance and risk management by the
operator is essential if insurance is to be obtained. Failure
to comply with insurers' recommendations or requirements can result
in a reduction of insurance, an increase in premiums or even withdrawal
of cover completely; in this case, in some countries an operator's
license to operate the site could be withdrawn. Therefore there
is a strong argument, both from a political and safety perspective,
which says that external scrutiny of nuclear operators by the
private sector insurance market is a valuable addition to the
overarching desire to optimise public safety.
2. Role of Government and the Question of
Subsidy
2.1 In excess of the liability compensation
provided by the private insurance market, Governments or the nuclear
operators step in to provide additional compensation, in some
cases up to a further limit and in other cases for an unlimited
amount. It is this aspect that sometimes attracts accusations
of an "insurance subsidy" for the nuclear industry.
However, the reality is that this secondary tier has never been
required in the history of nuclear insurance and it is less likely
to be required in the future as new, safer reactor designs are
introduced as nuclear "new build" gathers pace. Private
sector insurance has therefore provided the full liability and
physical damage insurance requirements for the majority of nuclear
plant over the past 50 years; whilst the only "subsidy"
provided is excess compensation of the last resort—something
that Governments provide to any industry or disaster with serious
off-site consequences.
2.2 It should also be remembered that under
the Conventions, the nuclear operator's liability is strict and
he does not have to be at fault to provide compensation; this
is more onerous than many liabilities and therefore better qualifies
for a comprehensive regime that contemplates what is required
in excess of amounts provided by insurers or the operators' balance
sheets. However, the existing limits are fully matched by private
insurance.
2.3 The Chernobyl accident in 1986 was not
insured because the nuclear insurance pools were unwilling to
offer insurance to the Soviet Union at that time; this was because
of known problems with plant design, maintenance and a lack of
adherence by the Soviet Union to the international Conventions.
Some countries remain uninsured for similar reasons today and
the insurers' technical understanding and abilities in the nuclear
sector are essential to maintain a close watch on the nuclear
sector in a role that complements that of most national nuclear
regulators.
2.4 In the future, should the liability
revisions be acceptable to the international insurance market,
the private sector will be able to provide the majority of the
foreseeable financial compensation requirements for a revitalised
nuclear sector; the new financial limit will be
700 million (£480 million), over three times
the current UK limit. New, safer reactors with a theoretical chance
of a catastrophic accident of around 1 in 3 million will mean
greater private sector acceptance than available today of the
risks at affordable premiums.
3. Current Difficulties Caused by Amending
the International Liability Conventions
3.1 The requirements of the international
liability Conventions are currently satisfactorily provided for
by private sector insurance, however dramatic increases in the
financial or temporal compensation requirement or the scope of
cover will present the insurance market with difficulties. The
recent revision of the international Conventions has indeed widened
scope of cover and increased the compensation requirements and
these changes are now the subject of debate amongst insurers and
operators alike.
3.2 Providing UK nuclear sites with the
revised financial limit of £480 million itself is not likely
to be a problem for insurers, but only if the scope of cover is
restricted to insurable risks and the time limit remains at 10
years.
3.3 The increased scope of cover now offered
by the Conventions was proposed to offer more compensation to
more people in the event of a nuclear accident and, presumably,
to put the state's role as "compensator of last resort"
more remote; however, the likelihood is that the private insurance
market's difficulties in meeting the new obligations will produce
the opposite effect and insurance capacity may well slip away
from the nuclear insurance market as the liabilities become less
clear and more open to abuse.
3.4 In particular, the incorporation of
responsibility for reinstatement of some environmental damages
and the ambiguous broadening of economic damage in the Conventions
present insurers with unquantifiable and therefore uninsurable
risks, thereby leaving significant liabilities with nuclear operators
and ultimately Government. Similar difficulties are being experienced
by all insurers in the non-nuclear market since the introduction
of the EU's Environmental Liability Directive which potentially
imposes similarly uninsurable obligations on industrial site operators.
In this case, both DEFRA and HM Treasury have recognised the fact
that such undefined environmental obligations are uninsurable
and it is recommended that similar recognition regarding the revised
nuclear Conventions is therefore provided to nuclear operators
and insurers.
3.5 If Government assumed the obligations
imposed upon the operators by the ambiguous new scope of the Conventions,
then no insurance would be required and a subsidy would be created.
However, if this option is unacceptable to Government, at least
some postponement of imposition of the obligation will be necessary
until some of the risks are better understood by insurers and
are therefore capable of being quantified and perhaps insured.
This is the position adopted by Governments regarding the EU environmental
liability directive.
4. The Special Case of Terrorism
4.1 With strict liability imposed on nuclear
operators by the Conventions, it follows that compensation following
acts of terrorism is also their responsibility. Recent terrorist
atrocities have opened the possibility of a new dimension to the
risk profile of nuclear plants—that of frequency of attacks.
Hitherto, insurers have committed capacity to nuclear insurance
on the basis of infrequent, but severe events; the prospect of
multiple, indiscriminate terrorist attacks has added a new dynamic.
4.2 Insurers have, since 2002, secured the
help of Government in meeting this new risk through a partial
(and reducing) indemnity. Governments both in the UK and abroad
are frequently required to provide financial assistance as a last
resort for all businesses, as terrorism is often regarded as a
political act and it has proved difficult to insure without the
existence of numerous state-backed schemes.
4.3 Revised arrangements whereby Government
would step in with supplementary financial support only following
multiple terrorist attacks within a finite and defined period
are recommended; this will enable the private insurance market
to continue to provide capacity for infrequent events of whatever
cause, but would protect the balance sheets of insurers in the
event of a multiple terrorist attack of unprecedented scale.
5. Conclusions
5.1 The international private insurance
market, represented by NRI in the UK, has played a key role in
insuring the development of the nuclear sector for nearly 50 years
at no cost to the UK taxpayer; it has also assisted with ensuring
the safe and reliable operation of the nuclear sites over this
time.
5.2 If the insurance market is to continue
this mutually beneficial partnership with the nuclear industry,
Government needs to assume some of the remote but uninsurable
additional responsibilities placed upon nuclear operators by the
revision of the OECD's Paris Convention on Third Party Liability.
19 September 2005
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