Indian reinsurer GIC Re explores ILS for nuclear insurance pool

by Artemis on February 2, 2015

GIC Re (General Insurance Corporation), the national reinsurance company in India is exploring the use of insurance-linked securities (ILS), or catastrophe bond type structures, as a financial tool to create capacity for a proposed nuclear insurance pool.

As Artemis wrote almost two weeks ago, the Indian government has been searching for an insurance and reinsurance solution to a nuclear liability issue in order to overcome a fear that foreign suppliers to its nuclear industry have regarding its 2010 law, the Civil Liability for Nuclear Damage Act 2010.

Establishing the Indian Nuclear Insurance Pool is an initiative which aims to meet the insurance needs of the liability act, providing a capital facility that can appease foreign companies and provide the nuclear liability insurance capacity that is required in order to continue development of the countries nuclear industries.

The nuclear insurance pool seeks to provide Rs. 1,500 crore of capacity (approximately USD$250m), with the founding member insurance and reinsurance companies providing half of this (Rs. 750 crore or $125m), while the rest will be secured through other financing arrangements.

One of the financing arrangements being explored is the use of an insurance-linked securities (ILS) or catastrophe bond type solution, which has been mooted in combination with a government backed sovereign guarantee.

According to the latest reports in Indian newspapers, GIC Re has issued a request for proposals for consultants and advisers to assist with the planning of a nuclear-linked ILS bond issuance.

The start of this process will certainly need to be a feasibility exercise, testing the appetite of key investors in insurance-linked instruments and discussing the possible ways such an ILS or cat bond could be structured.

The simplest way to design a trigger for such a bond would likely be as an indemnity ILS transaction, linked to the loss experience of the nuclear insurance pool. The ILS could payout for losses the pool of Rs. 750 crore and above, on a sliding scale basis up to the Rs. 1,500 crore exhaustion point.

The question will be whether ILS investors are able to accept the credit risk associated with an exposure to the pool members, as well as the actual nuclear liability risks that underlie it. Risk modelling for such a deal would be complex and a lack of available data and insight on the Indian nuclear plants may be a sticking point.

Chairman of GIC Re A.K. Roy told the press that it would be desirable to raise the Rs. 750 crore with the issuance of catastrophe bonds if possible, but that the structure of any bond or other reinsurance solution needed to be defined. He also told the press that any insurance-linked bond issuance could be national or offshore, GIC Re is agnostic as to the solution and structure and seeks assistance from domestic and international consultants.

If such an ILS issuance is to be successful the key will be in getting investors comfortable with the transparency of the risks involved. Risk modelling to define the probability of attachment will need to be undertaken by an internationally recognised specialist third-party firm and it would take some time to educate investors in this new risk class.

To begin, it seems more likely that the nuclear insurance pool will find a sovereign guarantee the most efficient way to get up and running, but if GIC Re continue to pursue the use of an ILS or cat bond like solution it could become feasible in time. Don’t expect anything to be announced quickly though, the process of structuring such a bond would be lengthy and complex.

GIC Re sent us the following background information on the Indian Nuclear Insurance Pool initiative:

The genesis of the Indian Nuclear Insurance Pool can be traced back to the passing of the Civil Liability for Nuclear Damage Act 2010 by the Indian Parliament. This brought third party liabilities following nuclear events under its ambit. The objective of forming the Indian Nuclear Insurance Pool is to ensure availability of appropriate insurance cover to meet the requirements as stipulated in the Civil Nuclear Liability Act 2010. The only barrier to creation of an Indian Nuclear Insurance Pool in collaboration with the international Nuclear Insurance Pools earlier was the issue of opening up of our nuclear installations for international inspections.

The Indian Nuclear Insurance Pool is not in a position to seek capacity from similar Nuclear Insurance Pools that exist in other countries as we are not able to satisfy their basic requirement of inspection of nuclear installations. The Indian Nuclear Insurance Pool would be administered by the Indian Reinsurer GIC Re and the Liability Insurance cover would be underwritten by public sector non-life insurance company The New India Assurance Company Limited.

The Pool will begin operations with a capacity of Rs 1500 crore. The five PSU Non-Life insurance companies, including GIC Re would bring in a capacity of Rs.750 crore. The remaining capacity may come in the form of guarantee worth Rs.750 crore from the Government of India. However we are also exploring other avenues for gathering the capacity.

The Indian Nuclear Insurance Pool would provide end to end complete risk transfer through Insurance product for both Operator and Suppliers to cover their liabilities arising under the provisions of CLND Act, 2010 and associated rules. Once operational, the various products that would be issued by the Pool would be under the liability class and the risks would be under the various sections of the Act.

The Indian Nuclear Insurance Pool would not rely on any specific existing template for creation of products, pricing of products and administration of the Pool. However, specific products, the policy wordings and the pricing of the products, these would depend on various factors such as probability, severity and exposure of people and property to nuclear installations and nuclear events.

GIC Re, the administrator of the proposed Indian Nuclear Insurance Pool has the expertise of running/ administering Insurance Pools. For more than a decade now, GIC Re has been successfully running the Indian Terrorism Insurance Pool. The Indian Reinsurer is also the manager for the International Natural Catastrophe Insurance Pool, the FAIR Nat Cat Pool created by the Federation of the Afro Asian Insurers and Reinsurers (FAIR), for over a year now.

The Indian Government and the Indian Insurance Industry are together working on a solution to provide third party liability cover for the nuclear industry in India.

Other articles on India and GIC Re’s ambitions in the catastrophe bond space:

– India explores catastrophe bonds for nuclear liability issue.

India’s IRDA has ambitions to see local catastrophe bonds issued.

India’s GIC Re ‘making progress’ on potential catastrophe bond issue.

India’s GIC Re still investigating catastrophe bonds.

India’s GIC Re approves use of catastrophe bonds for risk transfer.

India’s government to discuss disaster management and catastrophe bonds.

Indian government says ‘use catastrophe bonds’.

Indian market moving towards catastrophe derivatives and bonds.

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