Insurance Coverage Key to Nuclear Expansion Plans

[What I have always found interesting about this issue is how so many other industries have stronger liability limits, e.g., airlines, yet do not receive the press.]

http://calibre.mworld.com/m/m.w?lp=GetStory&id=312241361

Raymond J Lehmann

Released : Monday, June 30, 2008 1:09 AM

It is regarded among the thorniest, most unquantifiable of all risks. But with energy prices soaring to record highs, the case for nuclear power is receiving renewed public attention and, for the first time in decades, sparking significant political debate.

Presumptive Republican presidential nominee Sen. John McCain has hit the campaign trail with a call to build 45 new reactors over the next 20 years, a nearly 50% increase, with a plan to speed up permitting and encourage domestic manufacture of key parts.

His Democratic opponent, Sen. Barack Obama, has been critical of the plan on grounds that McCain hasn't explained how he would handle nuclear waste. But Obama hasn't dismissed the nuclear option outright, calling it "reasonable – and realistic – for nuclear power to remain on the table for consideration."

Though often viewed as virtually uninsurable, those who regularly write and place nuclear risks paint a very different picture: that of a remarkably stable market with few claims and steady profits. Moreover, they say, a significant expansion like that called for by McCain would actually serve to grow, not shrink, available capacity.

Much of that is due to the structure of the 51-year-old Price-Anderson Act, the federal law governing liability for the U.S. nuclear industry. Last extended by 2005's Energy Policy Act, and not set to expire again until 2025, the law caps private industry liability at $10 billion, while requiring the nation's 102 nuclear facilities each to maintain at least $300 million in coverage.

Though any insurer could provide that primary layer, in practice, the only source is Connecticut-based joint underwriting authority American Nuclear Insurers, whose 22 members – each of whom must be rated at least A- (Excellent) by A.M. Best Co. – include such familiar names as American International Group Inc., Hartford Financial Services, Chubb Corp. and Ace Ltd. The balance of private coverage is provided through a secondary layer funded by post-event assessments on all facilities, which is why growth in the number of plants would actually increase available coverage, noted Gary Uricchio, ANI's vice president of underwriting.

"For every reactor that's in the program, they're liable for $100.59 million, so if you've got more reactors in there, that limit would go up, the secondary financial layer would increase," Uricchio said. "Our layer, at least for the time being, would still stay constant at $300 million."

That $300 million layer would be supplemented, in the event of a much-feared terrorist attack on a nuclear facility, by the $100 billion federal backstop erected by the Terrorism Risk Insurance Act, including coverage extended in the most recent TRIA renewal for domestic acts of terrorism. And though there have been no major U.S. nuclear accidents since 1979's Three Mile Island incident, ANI does pay claims, Uricchio notes.

"We can get claims on normal operations. It doesn't have to be an actual event, it could just be releases that are within regulatory limits," he said. "It could be meritless, where people come down with cancer and they're downstream from a reactor, but you still would have to defend."

More significant claims are often paid by Delaware-based Nuclear Electric Insurance Ltd., a captive mutual insurer that covers the U.S. nuclear industry's property and operational risks. Owned jointly by nuclear power providers like Exelon, Entergy and Florida Power & Light, NEIL – rated A (Excellent) by A.M. Best – paid out the second-largest claim in its 35-year history in 2007, a $173 million final adjustment for damages caused to FPL's St. Lucie Nuclear Plant by hurricanes Frances and Jeanne in 2004.

In addition, noted David Scott – managing director of Willis Risk Solutions' utility practice and a former NEIL underwriter – while ANI offers cover for liability claims filed by on-site contract workers, nuclear plants must procure workers' compensation coverage for their own employees in the private market, like any other employer.

"Workers' comp does not have a nuclear exclusion, so the commercial market would pick up the workers on a nuclear site," Scott said. "Now, post-9/11, there was a lot of concern about aggregation of risk, so that market is somewhat constrained, but the market will still provide workers' compensation insurance."

Price-Anderson's structure is unique among nuclear nations, Scott noted, but pooling arrangements are not. Similar national pools exist in Canada, Spain, the United Kingdom, France, Germany, Japan, Korea, Taiwan and a number of smaller nations. The Vienna Convention, signed by 20 countries in the wake of the 1986 Chernobyl accident, requires limits of 700 million euro ($1.1 billion). Most national pools look beyond their borders for capacity by reciprocally offering facultative reinsurance, a system which seems to work even for less-mature insurance markets, Scott said.

"Willis is the broker for the next four construction projects in China for China Nuclear Power. We placed that within the Chinese market, though they did get facultative reinsurance," he said.

Still, Price-Anderson has its share of critics, ranging from Greenpeace to the consumer group Public Citizen to the free-market Cato Institute. Cato Senior Fellow Peter Van Doren said his group believes the system distorts markets and inappropriately places taxpayers on the hook for potentially hundreds of billions of dollars in losses.

Cato has estimated the cost of the Price-Anderson subsidy at 2 to 3 cents per kilowatt hour, but Van Doren notes that "anyone who tells you they know for sure isn't being honest." Moreover, even with that and other subsidies in place, private investors haven't shown much interest in nuclear, which could render McCain's plan moot.

"Nuclear power exists only because of the intervention of governments. There is no nuclear power industry anywhere in the world that's actually market driven," Van Doren said. "The big nuke burst may happen, but a lot of things have to happen first and a lot of opposition has to melt away for that to occur."

(By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)

Copyright 2008 A.M. Best Company, Inc.