Deeper Pool

Some suggest Canada will need a larger pool of nuclear insurers when the Energy Safety and Security Act, the subject of Senate committee hearings this past December and not yet passed into law, comes into force. That expectation seems to be in line with current efforts by the Nuclear Insurance Association of Canada (NIAC) to attract new members to the existing pool since it is possible more nuclear insurance capacity will be needed as early as the end of June.

Some insurers may be interested in competing with NIAC, but a lawyer who previously worked for Ontario’s electrical power utility says that federal officials responsible for authorizing new competitors to cover nuclear risk would need to ensure these insurers can handle claims that could arise from a large-scale evacuation.

If passed into law with no amendments, the federal Energy Safety and Security Act (Bill C-22) will increase the absolute and exclusive liability of nuclear operators (including electricity generation stations) in Canada from the current $75 million to $1 billion.

At least 50% of that liability will need to be covered by an insurer approved by the federal natural resources minister, while as much as half could be covered by “an alternative financial scheme,” David McCauley, director of the uranium and radioactive waste division at Natural Resources Canada (NRCan), said during a recent hearing of the Senate Standing Committee on Energy, the Environment and Natural Resources.

Among other things, Bill C-22 proposes creating the Nuclear Liability and Compensation Act, which in essence, makes nuclear operators liable – without requiring claimants to prove fault or negligence – for injury or damage to third parties resulting from the “fissionable or radioactive properties of the material” they hold. It further proposes that the absolute liability increase to $650 million upon the bill receiving Royal Assent, $750 million one year later, $850 million two years later and $1 billion three years later.

With that gradual increase, the federal government is providing “an opportunity for the insurance markets to realign to provide the level of capacity to the Canadian operators that is required to cover that risk,” Niall O’Dea, director general of the electricity resources branch at NRCan, said during the committee hearing.

Natural resources minister Greg Rickford earlier noted in the House of Commons, members of which voted to pass Bill C-22, that it would also “broaden the definition of compensable damage to include physical injury, economic loss, preventative measures and environmental damage.”

CURRENT COVERAGE

To cover operators of nuclear installations for such risks, there are currently four approved insurers – NIAC, an association of insurers that form liability and property damage pools for nuclear installations; Nuclear Risk Insurers Limited, a British nuclear association of individual commercial insurance firms; American Nuclear Insurers, a nuclear association in the United States of individual commercial insurance companies; and European Liability Insurance for the Nuclear Industry, a Belgian mutual insurance association that is based in Brussels – designated by Canada’s natural resources minister, notes an email response from NRCan.

A handbook published by the London-based Nuclear Pools’ Secretariat notes that insurers typically protect their solvency by excluding nuclear peril. In countries that use nuclear reactors to provide electricity, insurers generally voluntarily provide capacity to the pools of which they are members, and those pools generally underwrite the nuclear operators’ coverage.

Although NIAC does not publicly identify its current members, it “underwrites the majority of insurance coverage for Canadian nuclear generating station operators,” notes an email from the Canadian Nuclear Association (whose members include Bruce Power LP, Ontario Power Generation Inc., NB Power and Hydro-Quebec).

SEEKING MEMBERS

With the proposed increase in operators’ absolute liability, however, more capacity will likely be needed “before the end of 2015 and possibly before the end of the second quarter,” says NIAC general manager Colleen DeMerchant.

“NIAC is actively seeking new members to take up part of this increased capacity requirement,” DeMerchant says. “We would encourage more primary companies to participate because we currently have a very good representation of reinsurers in Canada.”

Asked what NIAC would be looking for in new members, DeMerchant responds that an insurer “licensed and regulated by (the federal Office of the Superintendent of Financial Institutions) with provincial licensing in jurisdictions where nuclear facilities are located would generally meet the basic criteria.”

New members “will be able to participate without restriction in the liability and property pools,” she points out, suggesting that “this opportunity provides a non-correlated risk exposure with practically a zero loss ratio and a very competitive expense ratio, which helps to diversify their portfolio.”

LARGER POOL NEEDED

If Bill C-22 is passed into law, “there probably will be a need for a larger sort of pool of insurers or reinsurers,” says Stanley Berger, a partner with Fogler Rubinoff LLP Lawyers, who specializes in environmental and nuclear law, and former assistant general counsel at Ontario Power Generation.

A Canadian Nuclear Association spokesperson reports the association has urged Ottawa to “foster competition” in nuclear insurance, and Berger says some insurers appear to be interested in competing in that market.

Without mentioning names, he notes that there are what he calls “potential suitors” willing to provide cover for nuclear liability risk in Canada and to compete with NIAC.

Bill C-22 could provide an opportunity for managing general agents “to help place some capacity with foreign insurers if existing and new NIAC pool members cannot build the capacity required,” points out Kim Neale, national product leader, environmental at Burns & Wilcox Canada.

“It is possible that increased capacity may be delivered by current pool members,” Neale says, but adds “the growth of new pool members that have never participated in the past may be hindered because of Fukushima,” the nuclear power plant in Japan hit by a tsunami nearly four years ago.

Before approving any new insurer, NRCan officials would “want to know what kind of experience these insurers have had with responding to claims,” Berger suggests. He points out that a large evacuation could be ordered, as a precaution, even in a case where not enough radiation is released to cause health problems.

“The government is going to be looking at claims administration, they are going to be looking at capital available within the jurisdiction, the extent of that capital, solvency and financial statements for the insurer,” he expects.

“It’s not a simple matter. It’s not just, ‘Oh, what’s their capacity?'”

EXTREME CASES

Of course, not all of the liability imposed on Canadian nuclear operators is covered by the insurers.

“There are extreme cases or some limited cases in which the government will provide indemnity,” Jeff Labonté, director general of NRCan’s energy safety and security branch, said during the Senate committee hearing.

Under the existing Nuclear Liability Act (NLA), the risks currently covered by insurers include bodily injury, sickness, destruction or radioactive contamination of property, and loss of use of property due to contamination or evacuation, notes the email
response from NRCan.

“The insurers also provide partial coverage for damages resulting from a terrorist act,” the federal department adds.

Through a reinsurance agreement, the federal government “would provide coverage for any other form of damage that a court would interpret to be damage” under NLA, NRCan reports, adding that the government “also provides about 75% of the coverage for damages resulting from a terrorist act.”

Bill C-22 proposes allowing the government to “enter into an indemnity agreement with an operator” under which the government “covers any risks that, in the minister’s opinion, would not be assumed by an approved insurer,” NRCan’s response notes.

Risks that would not be covered by insurers are “still being discussed with the insurers,” it adds.