The insurability of nuclear risk

Transcription

1 The insurability of nuclear risk Pierre Picard Ecole Polytechnique Paris - 15 Nov Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

2 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). Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

3 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

4 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

5 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

6 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

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9 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 Some European nuclear operators are members of Nuclear Electric Insurance Limited (NEIL), an American mutual dedicated to nuclear risks. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

10 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

11 Nuclear insurance in the US (2) Two tiers of insurance 1 First layer : Each utility is required to purchase coverage up to minimum level : currently $375 million per site, 2 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 Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

12 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 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

13 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). Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

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15 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

16 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... Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

17 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

18 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? Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

19 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. Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

20 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? Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

21 Pricing the nuclear risk (3) 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). Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

22 Pricing the nuclear risk (4) 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! Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23

23 Pricing the nuclear risk (4) 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! Pierre Picard (Ecole Polytechnique) Paris - 15 Nov / 23