Insuring a nuclear future
1 September 2008
This article first appeared in the latest issue of the Market magazine. Use the link to the right to view the whole magazine.
With the London insurance market at the global heart of specialised risk transfer and the UK being a pioneer of nuclear insurance, potential resurgence in the nuclear power industry poses a tough question: what are the opportunities and what are the obstacles to be overcome?
The global nuclear industry’s star is rising, largely as a result of the pressure to find a reliable power source of so-called clean energy to meet climate change targets. The UK government gave political approval for a new generation of nuclear power stations in January. China, which connected its first commercial reactor to its national grid in 1991, now has 11 working reactors and six under construction. It plans a six-fold increase in nuclear capacity by 2020 and then a further three- to four-fold increase by 2030.
Around the world, there are currently 435 operating reactors, with a further 35 being built. Given the huge investments and multiple risks associated with nuclear energy, it continues to be a contentious issue – new development faces significant challenges and progress can be slow.
Michael Dawson, Active Underwriter of Chaucer’s Nuclear Syndicate 1176, says the plans for a new fleet of nuclear power stations in Britain are encouraging but they are unlikely to be completed before 2016, about the same time as existing units will be closing. He says: “In the developed world, about 20% of power is provided by nuclear power stations. As many are approaching normal retirement age and assuming new build does occur from 2016–2025, the percentage of nuclear is unlikely to exceed 20% of the developed world’s power.
“Accordingly, while new build is encouraging (without it we would probably have a declining nuclear market and power shortages), there is unlikely to be an increase in nuclear business, comparatively, until at least 2025.” There are specialist risks to be covered, from the mining of nuclear fuel to the construction and testing of power stations, as well as the widely publicised risks associated with decommissioning and disposing of nuclear waste. Many are international and highly complex.
Hamish Roberts, Managing Director of Aon’s natural resources team, says key issues include not just safety breaches but security of fuel supply. The uranium that is enriched to become nuclear fuel comes from sources such as Australia, South Africa, Niger, Gabon and Namibia.
Fuel security is key
Among the political risks, it will be crucial for the UK to keep friendly relations with Australia, while of the African sources Niger has the highest risk potential. Roberts says the UK Government’s plans for nuclear expansion are achievable only if it “thinks beyond just the risks of safety to the threat of fuel security”.
In particular, China’s growing appetite for uranium could change the market dynamics. Philip Veale, Managing Director of Aon’s power and utilities focus group, points out that, in the face of enormous nuclear growth in China and expansion in the US – no matter how friendly relations are between the UK and Australia – its interests in the marketplace for uranium will be dwarfed by far bigger players.
The nuclear insurance market currently offers cover for property, business interruption and third-party liability. Veale argues that underwriters should get involved in strategic questions such as that of fuel security.
He says that Lloyd’s and the London market should be closely involved with industry and government to ensure a sound financial and legal framework for the next generation of nuclear power stations, and that the current pool structure may not be enough for the risks of the future. He says: “We need to review it, with a view to a fundamental redesign. There’s some great value in what it has been doing but there’s a new challenge in front of us.”
Veale says the nature of the risks has changed since the pool was created in the 1950s. Not only has the technology developed, the scale of the risks has multiplied.
As an example, he gives a hypothetical but realistic example of a nuclear site on which a new reactor is being built. There are two other reactors there. One is still generating and one is being decommissioned. The decommissioning team makes a mistake and there’s a leak of radiation, rendering the site unusable. The financial ramifications are enormous. The contractor building the new reactor will sue to recover its investment – it could be several billion pounds into its project – as will the operator of the working reactor, which has a contract to supply electricity that it now cannot fulfil. Veale sees costs running towards £10bn before damage to the site or other third–party liabilities are even considered. It is a far cry from the industry’s early days, when reactors were typically in the hands of a state-run utility and isolated from major third parties.
The construction risks can be handled by existing capacity in the construction market but there are strategic questions that could benefit from an insurance perspective, such as the flooding risk. Veale points out that most existing nuclear sites in the UK are low lying and says they are particularly vulnerable on their land-facing sides, rather than their sea-facing sides.
In addition, the international conventions that govern nuclear liabilities in many Western countries are generally increasing the scope of liabilities that an operator may face, with higher limits and broader definitions of what constitutes nuclear damage.
Other questions remain over subjects such as waste storage, liabilities of designers and builders and a need to harmonise power supply contracts with European regulations to give nuclear operators the long-term certainty they need to justify the very high start-up costs.
Piecing together the jigsaw
Veale says: “We need a working party in London to bring together the family of Lloyd’s, the London market and the CII to develop a solution that integrates the risks of all the parties so we can actually see how the jigsaw fits together.”
Mark Tetley, Managing Director of the British nuclear pool, Nuclear Risks Insurers, argues that the pool has developed to match the industry’s growth and increasing sophistication. He says the basic nature of the risks is still the same – property, consequential loss and liability – although its scope is increasing, so that insurers are now looking at environmental and decommissioning risks.
Tetley says: “I’m very positive about the UK’s nuclear new build framework, as I believe it will be the most sophisticated globally. The insurance market is already playing a central role in helping the Government develop this model.
“For example, guidance on the establishment of a financial programme to provide for private sector cover for waste management and decommissioning liabilities and the risks to funds set aside for this purpose is under consultation. The insurance market has responded to this call for consultation and will be heavily involved.”
Last updated on 01 Sep 2008
