The insurability of nuclear risk

Transcription

The insurability of nuclear risk
Pierre Picard
Ecole Polytechnique
Paris - 15 Nov. 2011
Pierre Picard (Ecole Polytechnique)
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Preventing, self-insuring, pooling and transferring risks
Risk pooling (i.e. the mutualisation of risks) is the essence of
insurance.
Risks can also be prevented and self-insured (e.g., through captive
insurance companies for corporate risks).
Insurance also involves risk transfer through reinsurance, possibly
with risk sharing within a pool of reinsurers, and capital markets,
including various form of Alternative Risk Transfer mechanism :
securitization (catastophe bonds, side-cars...) and contingent capital
structures (contingent debt, contingent equity).
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Insurability in a strict sense and in a broader sense
In the strictest sense of the word, the insurability of a risk refers to
the ability of insurance companies to o¤er coverage through
mutualisation techniques. Pools of insurance companies or dedicated
mutuals (insurance captives) are among these techniques.
In a broader sense, it refers to the possibility for …nancial institutions
(insurers, reinsurers, hedge-funds...) to cover the risk through various
forms of risk transfer.
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Liability for nuclear damages
Nuclear liabilities principles are based on international conventions Vienna Convention (1963), Paris Convention (1960), Brussels Convention
(1960)... - and laws (e.g., Price-Anderson Act in the US) :
Strict liability : the victim is relieved from proving fault or
negligence of the operator,
Exclusive liability : in case of an accident, all claims are to be
brought against the nuclear operator,
Mandatory …nancial coverage : the operator must maintain
insurance cover that guarantees a minimum amount of protection of
victims,
Exclusive jurisdiction : only the courts of the country in which the
accident occurs has jurisdiction over damage claims,
Limited liability : beyond a certain level of damage, responsability is
passed from the individual operator either on to the State or a mutual
collective of nuclear operators, or both.
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Structure of nuclear insurance
Nuclear risks are usually covered by of mixture of :
self-insurance by nuclear operators for low-tier risks (possibly
through captive arrangements),
market insurance (including pools of insurers and mutuals) and
reinsurance, under the limited liability of nuclear operators ,
guarantee by governments above this limit.
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Insurance pools (1)
Nuclear insurance is generally provided for by insurance pools.
Insurance pools bundle insurance capacity at a national level =) the
market can o¤er insurance coverage for risks that surpasses the
capacity of any member of the pool.
Every pool member declares annually the coverage it is willing or able
to o¤er.
When claims payment have to be made, each member of the pool has
to contribute a ratio of its participation as contractually agreed with
the pool.
Reinsurance is established between the di¤erent national pools.
Most countries with nuclear power plants have their own national
insurance pools.
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Insurance pools (2)
For third party insurance : a Belgian nuclear operator can only buy
insurance with the Belgian pool, the German operator with the
German pool, etc.
This monopolistic position of the nuclear insurers has been
heavily critized.
In Europe, nuclear operators created mutuals as a reaction to the
nuclear insurance pools : the European Mutual Association for
Nuclear Insurance (EMANI) in 1978, European Liability Insurance for
the Nuclear Industry (ELINI) in 2002. Some European nuclear
operators are members of Nuclear Electric Insurance Limited (NEIL),
an American mutual dedicated to nuclear risks.
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Nuclear insurance in the US (1)
The Price-Anderson Act (P-A, 1957).
A pool of insurance companies : the American Nuclear Insurers
(ANI), comprised of some 60 stock insurance companies.
About half the pool’s total liability capacity comes from foreign
sources such as Lloyd’s of London.
The nuclear operators’mutual arrangement is carried out by Nuclear
Electric Insurance Limited (NEIL).
In 2005, P-A was reauthorized for the next 20 years by President
Georges W. Bush.
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Nuclear insurance in the US (2)
Two tiers of insurance
1
2
First layer : Each utility is required to purchase coverage up to
minimum level : currently $375 million per site,
Second layer (retrospective premium payment) : If claims following
an accident exceed the …rst layer, all nuclear operators have to pay up
to $112 million per reactor per accident, payable at the rate of $17.5
million per reactor, per year.
Given the number of reactors, there is about $12.6 billion of insurance
protection.
The average annual premium for a single-unit reactor site is $400,000.
More than $200 million has been paid in claims and cost of litigation
since P-A went into e¤ect, including $71 million following the Three
Mile Island accident in 1979.
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Nuclear insurance in France (1)
The "Pool Français d’Assurance des Risques Atomiques" was founded
in 1957 as an "Insurers Association". It turned into an "Economic
Interest Group" (GIE) in 1969 and changed its name into
Assuratome in 1995.
Members of Assuratome are insurance and reinsurance companies
operating on the French market. They pooled their insurance
capacities dedicated to the coverage of nuclear risks.
Assuratomes’own capacities are enriched with additional capacities
provided by foreign nuclear pools and o¤ers its reinsurance capacities
to this pools.
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Nuclear insurance in France (2)
In France, nuclear operators have to take third party insurance but (as
in Japan and contrary to the United States) not necessarily property
or business interruption insurance.
Amending Protocols to the Paris and Brussels Conventions (2004)
=) higher limits for liability, with broader scope of application
(including environmental and economic damages).
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Japan after Fukushima
For the Fukushima accident in 2011 the government set up a new
state-backed institution to expedite payments to those a¤ected.
It will receive …nancial contributions from nuclear operators and from
the government (JPY 5 trillion, i.e., $62 billion from the
government).
In the future, the new institution will also operate as an insurer for
the industry.
The government estimates that Tepco will be able to complete its
repayments in 10 to 13 years, after which it will revert to a fully
private company with no government involvement.
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Back to the insurability issue
4 conditions for ideal insurability in the strictest sense of the word :
1
A large number of units, independently and identically exposed (law
of large numbers),
2
The expected losses should be calculable (no ambiguity),
3
The loss should be de…nite in time, place, cause and amount
(including a precise liability regime),
4
The loss should be accidental from the viewpoint of the claimant (not
intentional, and not too much moral hazeard or adverse selection).
These conditions are only partially satis…ed for small or medium size
accidents, and not at all for large scale nuclear risks, such as core
meltdowns, disposal of radioactive wastes, used of these wastes as
ingredients for a dirty bomb...
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Insurance and incentives to safety
Insurance pools only cover small or medium size risks, because of the
limited liability of nuclear operators.
This limited liability jointly with regulatory capture reduces the
incentives of the nuclear operators to invest in safety measures.
Example : Heal and Kunreuther (2009) point out the lack of
incentives of nuclear operators in the US to undertake risk reducing
measures under the Price-Anderson Act.
Insurers may provide such incentives, by gathering risk information,
using claims data to modify existing standards and rewarding …rms for
reducing risks.
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Pricing the nuclear risks (1)
Nuclear operators have limited liability and governments accepted
liability for the lion’s share of the risks.
Governments should have some degree of risk aversion (the
assumptions of the Arrow-Lind Theorem are not ful…lled in the case
of large scale nuclear risks).
Ttransfering large scale risks from nuclear operators to governments
makes sense because governments have less risk aversion than …rms.
The government’s liability is a contingent debt, which may be huge in
intensity : several hundreds of billion euros, maybe one trillion euros,
in the worst case scenario for a country like France.
Hence a fundamental question : can nuclear risks be priced and
transferred to …nancial markets?
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Running, cycling and insurance
Question : Can ambiguous risks be transferred ?
On September 2, 2007, a duathlon (running + cycling) was organized
by the british transport operator First Group around the shores of
Loch Ness in Northern Scotland.
First Group asked Royal and Sun Alliance to provide £ 1 million
liability insurance in case Nessie would jump out of the water and
attack one of the competitors.
Hence, the answer is YES ! Insurers add an ambiguity premium
to the risk premium.
However nuclear liabilities are not only ambiguous, they are huge.
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Pricing the nuclear risk (2)
The nuclear contingent liabilities of a State like France are huge, but
they should be compared to the portfolio values of potential …nancial
investors.
Just for illustrative purpose :
Market value of Apple = $354 billions on November 14, 2011,
Clean up and compensation after Fukushima = $60 billion ,
Worst case scenario at Indian Point = several trillion dollars...
Can these risk be transferred to …nancial markets ?
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A number of reason would make the transfer of these liabilities
di¢ cult, in particular :
1
The probability of a large scale nuclear accident is di¢ cult to
appraise (ambiguity of risk),
2
Nuclear accidents have long-lasting consequences (the city of
Chernobyl is still closed 25 years after the meltdown, radioactive
wastes are long-lived...)
3
The transfer of such large scale risks would require sophisticated
Alternative Risk Transfer mechanisms (including the bundling of
catbonds and contingent capital) involving several types of investors
(banks, insurers, reinsurers and hedge funds).
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However, these are technical di¢ culties, not impossibilities. There is
no fundamental reason for which large scale nuclear risks couldn’t be
partially or totally transferred to private investors which does not
mean that they should.
Hence, nuclear risks are insurable in the broad sense of the word. In
other words, there exists a market price for large scale nuclear
risks.
Economic e¢ ciency requires to know this price. This is not the case
today !
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Today, the price of nuclear risk is an hidden subsidy from
governments to nuclear operators. This subsidy should be included in
the cost of nuclear energy .
This is the only way to get away from a sterile opposition between on
one side environmentalists and green movements and on the other
side the nuclear industry lobby. Economic rationality arguments
maybe useful after all !
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The insurability of nuclear risk

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