THE INSURANCE OF NUCLEAR INSTALLATIONS AND ASSOCIATED RISKS
A brief outline of the Nuclear Insurance Pools, their history and development, fundamental principles and their raisons d’être.
The development of mankind’s facility to utilise the power of the atom and the subsequent emergence of the civil nuclear energy programme in the 1950’s presented insurers with two entirely new perils and two separate, but inter-related problems. The perils were those of failure to control the nuclear chain reaction with subsequent damage to the plant itself and of radioactive contamination, the effects of which could not be quantified nor the frequency of losses forecast, but which clearly carried a potentially devastating exposure to claims over a wide geographical area should a serious release of radioactive material occur.
The two resultant problems were how best to provide cover for the emerging nuclear industry in general (nuclear power stations, nuclear fuel enrichment and manufacture, nuclear waste treatment and disposal and also, in certain circumstances, radioisotopes) and, secondly, how to provide protection for the general public without exposing insurers’ solvency margins to the potentially catastrophic losses that could arise from widespread radioactive contamination.
The problem of how to provide cover for the nuclear industry itself was particularly difficult to resolve because it involved:-
- the impossibility of establishing accurate estimates of frequency in the absence of statistical knowledge or previous experience;
- the potential risk of enormous damage arising from contamination and the resulting cessation of economic activity affecting large numbers of population over widespread geographic regions, followed by long delays in claims notification as many of the effects on health only become manifest over a considerable period of years;
- the need to amass a substantial cover capacity for the benefit of a limited number of policyholders (even in 2007, only a little more than 400 nuclear power reactors are in operation throughout the world).
In order to provide adequate insurance cover for the operators of the expanding nuclear energy industry, specific measures needed to be taken. By reason of their nature and size, large nuclear risks ( power stations and spent fuel reprocessing plant) have been, from the outset, beyond the resources of any one national market - let alone an individual insurer - to provide cover; clearly, traditional insurance mechanisms were not suited to covering such risks.
The insurance industries of the world have responded to these difficulties by the formation of market-wide national Pools and by the widespread adoption of exclusion clauses in their non-Pool portfolios as a mechanism to harness the greatest possible capacity commitment in support of the nuclear industry. There are now 26 such market Pools, yet even with these it is today still not possible to provide full insurance cover for all nuclear operators’ exposure to risk.
Nuclear Insurance Pools:
A Pool is essentially a mechanism whereby a number of insurers agree to appoint a common agent to underwrite jointly a particular risk or class of business. It is a mechanism commonly employed where the risks in question are few in number, or require a capacity beyond the individual means of the members even if arranged on a traditional co-insurance basis, or which presents some particularly hazardous aspect which would render acceptance by conventional methods difficult if not impossible.
Nuclear insurance Pools were established by the major insurance markets of the world during the mid to late 1950’s in response to pressure from both Governments and the nuclear industry and have continued to develop in new markets since then.
The reasons for their establishment may be summarised as follows:
- The risk was unknown and potentially catastrophic and, therefore, would have discouraged most individual insurers from insuring it on their own.
- The risks were few in number and neither allowed a sufficient spread to provide a balanced portfolio nor warranted the establishment of individual underwriting departments by each insurance entity wishing to operate in this sphere of business.
- The catastrophe nature of the business would have rendered individual insurers vulnerable to unknown accumulations had the business been placed in a conventional manner using normal reinsurance and retrocession treaties.
- However unlikely a nuclear catastrophe, should such an event occur, claims handling and settlement procedures would require the support of the whole national insurance market - or, indeed, international markets.
- The exchange of common account reinsurance between national pools provides access to the worldwide insurance capacity to those national markets which wish to participate.
When insurers originally agreed to pool their resources to provide cover for the developing nuclear industry in the 1950’s the provision of cover was little short of an article of faith.
The risks involved were largely unknown and accumulated risk experience was nil. However, some 50 years of operation have served to justify that expression of faith and, as a result of its excellent safety record, the nuclear industry enjoys as wide an insurance coverage as any other major industry at premium rates as good or better than for any other class of business. This reflects the confidence of insurers in the pooling system, the security of the reinsurance arrangements effected on an inter-Pool basis and the cost-effectiveness of the system: premiums paid by operators to the nuclear Pools are, in effect, virtually pure-premium, since only a very small percentage is utilised to defray operating and administrative expenses.
Channelling of all nuclear liability to the operator installation has emerged as a fundamental principle and has been mirrored in the national liability legislation of non-Convention countries by either legal or economic channelling. Rapid compensation and provision of maximum capacity demand the assurance that only one insurance policy must respond to all claims arising from a nuclear incident in order to avoid the costly and time-consuming investigation and possible litigation on the question of who is ultimately liable for damages.
From the start, Nuclear Pools have liaised very closely with Governments and with the agencies responsible for the Nuclear Liability Conventions - the IAEA in Vienna for the Vienna Convention and the OECD Nuclear Energy Agency for the Paris and Brussels Supplementary Conventions. The recent amendments to these Conventions to incorporate far higher limits of indemnity into an expanded scope of cover makes this relationship as important today as when the Conventions were originally drafted and the demands for additional capacity equally acute.
Radioactive Contamination Exclusion Clauses
Certain perils carry such a potential to cause devastation that they are not capable of coverage by the private insurance market since the 1930’s. Some war risks have been held to be one such category, radioactive contamination is another.
Having taken legal advice in the late 1950’s to the effect that the then current policy wording would - as a matter of course - include damage arising from radioactive contamination in the majority of classes, and cognisant that such contamination could result in total policy limits being paid under every contract in an affected area, insurers resolved to protect their solvency by the exclusion of radioactive contamination from those classes where the risk was considered uninsurable.
The Governments of the countries in Western Europe have provided, and are in some cases still providing compensation to the affected population in their territories for contamination arising from Chernobyl, and these amounts alone in total have exceeded by several times the capacity of the nuclear insurance industry, thus reinforcing the view that such compensation can be considered solely for the account of Governments and not for the private insurance industry.
Although by concentrating their coverage on the power-station operators, insurers were able to deploy the maximum possible capacity in support of the new industry and thereby assist government in its promotion of the peaceful use of nuclear power, the decision to exclude the risk of radioactive contamination from the generality of covers had little to do with the formation of the Pool - it was the potentially catastrophic exposure to Insurers' existing portfolios that necessitated the exclusion.
Even in those markets where nuclear Pools have not been established, insurers have found it prudent to exclude radioactive contamination, irrespective of whether or not nuclear power stations have been built in the countries concerned.
It must be understood that the exclusion Clauses usually relate only to ionising radiation or contamination by radioactivity from nuclear fuel or nuclear waste arising from the combustion of such fuel. The clauses do not necessarily apply to other sources of ionising radiation such as radioisotopes, X-ray equipment or particle accelerators which are normally freely insurable in the open market. These lesser sources of radioactivity are of comparatively minor significance and are frequently not classified as nuclear material under the relevant legislation (although this position varies throughout the world); the degree of damage that could be caused is considered to fall within insurers’ likely exposure limits for other conventional perils.
The Chernobyl accident has demonstrated that the original fears of Insurers of a catastrophic exposure were well founded and that it is not possible for any domestic market to commit itself to the provision of cover for immeasurable and potentially unlimited compensation.
World-wide Inter-Pool Reinsurance
Pools are free to reinsure their business on a facultative basis mostly with other pools. Where such facultative reinsurance does occur, Nuclear Pools have developed “Standard Rules for the Exchange of Reinsurance between Pools” in order to establish clearly the guidelines for the commonly adopted and accepted practices for the exchange of business. Amendments to these standard rules are possible by bilateral agreement.
Reinsurance Cover Notes have been developed as the documentation for the individual risks which are ceded within the framework of the Standard Rules. Furthermore, there is an obligation for each Pool to produce a “Basis of Operations” document, according to a recommended format which includes the Pool’s constitution, the list of its membership, the standard policy wordings of the business which they cede and other useful information such as explanation of terms used in their policy wordings of reinsurance cover notes. These documents are circulated to all Pools with whom business is transacted.
These instruments help to generate the confidence needed to deal with high exposure risks and are therefore to the ultimate benefit of the insured operators.
The risks presented by the civil use of nuclear power are categorised as low-frequency, high-cost events. On the one hand, they demand a deployment of capacity by the insurance market that is greater than in any other sphere of industrial activity, but on the other, the risks themselves are few in number and present an unbalanced portfolio with a scant statistical data basis. Worldwide, nuclear risks generate an overall amount of premium which is disproportionately small in comparison with their political, sociological and economic importance and the size of the risks assumed by insurers. By the formation of net-line Pools, the insurance industries of the world have succeeded in accumulating the maximum available capacity for this class of business. Thus, the Pooling System operates to the benefit of the nuclear industry and ultimately society as a whole.