Nuclear Insurance Proliferation

Nuclear insurance pools have existed since the mid-1950s as part of the insurance fabric of most jurisdictions that employ the use of nuclear fission for peaceful purposes. Insuring nuclear facilities at first appeared daunting due to the new challenges nuclear technology brought. The extremely large values of insurance required, the new and unproven technology and the potential for catastrophic losses did not deter insurers, but instead united them to address these challenges by creating nuclear insurance pools. Creating these pools ensured the risk was spread throughout the insurance industry, accomplishing three important goals:

• providing the large limits required by the nuclear industry;

• providing protection to the general public; and

• protecting insurers’ solvency.

Sixty-seven Canadian insurers responded in 1958 by committing Cdn$13.5 million in capacity to the Canadian nuclear insurance pool to cover property and liability for nuclear risks. From the beginning, the Canadian nuclear insurance pool, named Nuclear Insurance Association of Canada (NIAC) — managed by the CUA (Canadian Underwriters Association), IAO (Insurers Advisory Organization) and now CGI Insurance Business Services — has seen many successes and challenges over the years.

While overcoming many of these obstacles, the pooling system, developed with such prescience by the insurance professionals of the mid-1950s, remains relatively unchanged after all these years. Canada’s pooling system is closely aligned with various other nuclear liability conventions in force throughout the world; it developed because of the main principles established under these conventions (commonly referred to as “channelling”). These principles are:

• strict liability — that is to say, liability without fault;

• exclusive liability of the operator;

• limitation of this liability in amount and in time.

• obligation on the operator to cover this liability by insurance or other financial security.

The operation of the first two principles creates a channelling concept, in that all liability is channelled to the operator without right of recourse.

All auto, property and CGL policy wordings contain nuclear exclusions. It is paradoxical that the use of these exclusions in conventional policy wordings allows for the most efficient means of insuring the nuclear facilities. Without these exclusions, significant risk-mapping would be required near nuclear facilities to ensure that concentrations of exposure would not be exceeded. In addition, liability mapping of some sort would likely be necessary for all contractors who perform work on nuclear installations. This would be cumbersome, time-consuming and possibly inaccurate. However, the channelling concept contained in nuclear liability legislation allows insurers, through NIAC, to issue one property policy and one liability policy (which covers the operator and all contractors and suppliers) to each nuclear operator. Members of NIAC thereby limit their nuclear peril exposure to each nuclear operator by their participation in NIAC.

A number of interesting challenges face the nuclear pooling system. The conventions have recently undergone revisions; one of the principal changes was to increase the amount of compensation available to victims of a nuclear incident. The Canadian legislation governing nuclear operators (the Nuclear Liability Act, or the NLA for short) also contains the main principles of the conventions. A revised NLA that reflects the recent changes to the conventions is now before Parliament. Currently, the NLA requires nuclear operators to carry Cdn$75 million in third-party nuclear liability insurance. The revised NLA will increase this requirement to Cdn$650 million. In addition, the nuclear power industry is experiencing a renaissance. Both of these factors indicate more insurance capacity will be required to meet the needs for nuclear insurance. Unfortunately, the number of Canadian insurers participating in NIAC has been declining, a trend the NIAC would like to see reversed.

ENTERING THE NUCLEAR POOL

Nineteen Canadian insurers and reinsurers are members of NIAC. Although capacity has increased slightly, the spread of risk is concentrated to only a few markets in Canada.

NIAC provides 92% of the Cdn$75 million, third-party liability insurance limit the NLA requires. However, when the new limit of Cdn$650 million becomes effective, NIAC’s percentage share will drop to 10% (foreign capacity provided through the British and United States nuclear pools is used to supplement the Canadian capacity, as required).

The main reason for NIAC’s decreased capacity over the years is due to consolidation in Canadian property and casualty insurance industry. NIAC may also, to some extent, have become a victim of its own success: it has run so smoothly that fewer and fewer underwriters are now familiar with how it works and the terms of its policies. This is unfortunate, since a strong Canadian pool lends credibility to the underwriting and engineering of Canadian nuclear business, which is currently in the forefront of the so-called ‘nuclear renaissance.’

NIAC always needs and welcomes domestic capacity. Capacity committed to NIAC must be on a net retention basis (a fundamental principle in the pooling system). If every insurer in Canada provided 1% of their company’s equity as capacity, NIAC’s capacity would be increased considerably and a good spread of risk achieved.

POTENTIAL BARRIERS TO ENTRY

One reason Canadian insurers cite for not providing capacity to NIAC, especially terrorism capacity, is the current situation with provincial insurance legislation, which prohibits insurers from excluding fire following a terrorism incident. Under the NLA, operators are liable for all nuclear incidents, even if that incident occurs because of terrorism. It is difficult for some insurers to support NIAC when they have decided not to provide terrorism coverage as a general matter of principle as a result of this provincial legislation. Addressing the fire following issue in provincial insurance legislation might allow more insurers to support NIAC for terrorism capacity or otherwise.

How safe are nuclear facilities, anyway? This is a question of some debate, especially since there have been two widely reported nuclear accidents — Three Mile Island (1979) and Chernobyl (1986).The lessons learned in these accidents and the resultant changes have transformed the way nuclear power stations are built, maintained and operated. Redundant safety systems and advances in technology, when coupled with the checks and balances of quality programs and human performance reviews (to mention a few initiatives), have resulted in an unparalleled culture of safety. Regulator oversight is vigilant. Peer review and information-sharing within the nuclear industry, even among competitors, is enviable. As a result, there is a high degree of confidence among the nuclear insurance pools about the safety of nuclear power plants. Notwithstanding these improvements and the confidence exhibited by the pools, increasing use of nuclear energy continues to demand an efficient and equitable method of providing compensation to victims of a nuclear accident.

Climate change is a term on everyone’s mind and there is a great deal of debate on how to reduce emissions. It is clear nuclear energy must be a part of this solution. Today there are 439 reactors worldwide. Thirty-five are under construction and 91 are planned. The number of proposed reactors is a staggering 228; this figure is growing almost on a daily basis. There are two refurbishment projects in Canada at the moment (Bruce Power and NBPower), with the possibility of others on the horizon. There are new-build opportunities in three provinces. This puts Canada at the forefront of the nuclear renaissance.

INSURING THE NUCLEAR RENAISSANCE

Nuclear insurance pools were formed when there were very few nuclear risks and the financial resources of many insurers were required to provide the necessary coverage. The worldwide nuclear pooling system that was developed represented the best risk transfer mechanism for this potentially catastrophic exposure. The pools are a true risk transfer mechanism: they use the assets of only insurers should a loss occur. The pools have not been subject to the insurance market price fluctuations that have characterized the hard and soft markets over the past 10 years. The pools are, in effect, funding for a catastrophe. It is therefore important that the underwriting approach be conservative and consistent, preserving the assets of its members. The solvency of member companies is also protected even if a catastrophic loss should occur. Finally, the pools have amassed more than 250 years of nuclear engineering experience — a resource our insureds highly regard.