Nuclear liability risk ILS transactions upsized for 2018

Private nuclear liability risk insurance-linked securities (ILS) transactions have been expanded and upsized for 2018, Artemis understands, as corporate nuclear power operators show increasing comfort with tapping ILS markets for direct insurance coverage.

These nuclear liability ILS deals were seen as ground-breaking, when details first emerged last year.

These transactions are relatively unique in the insurance-linked securities (ILS) space, not only due to the risks they feature (nuclear liability exposures) but because they have been directly transacted between a nuclear corporate and an institutional ILS investor, so are insurance rather than reinsurance arrangements.

The ILS investor behind these deals has been working directly with the owners of nuclear power plants, entering into risk transfer contracts structured around a debt instrument, enabling the investor to take on risks associated with nuclear incidents, across a number of plant locations.

The underlying structure works like an ultimate net loss trigger, with default of the debt investment, and so pay outs to the investor, based on an event occurring at one of a number of nuclear power plant locations that causes liability to arise, or the default of the issuer.

To the investor these deals are similar to a private cat bond-like format, offering it the ability to access a diversifying insurance-linked return, from a completely unique risk that is rarely available in ILS markets.

We understand that further issuances of nuclear liability ILS’ this year are to provide additional capacity to the original transaction (which consists of two bonds), with now around $40 million of capital backing the transactions.

The underlying arrangement is a 5-year transaction, with annual risk resets, sources told Artemis, providing flexibility and the ability for more operators or plants to be included in the coverage in future.

We’re told that there is growing interest from nuclear plant operators in this kind of arrangement, as the capacity required by these firms is not always or easily available from traditional insurance and reinsurance markets.

As a result, it’s expected that the transaction size and the amount of capital at risk in these nuclear ILS arrangements will increase over time.

These nuclear ILS arrangements cover multiple potential causes of liability, so are an effective insurance replacement for the nuclear plant operators and actually less restrictive than insurance and reinsurance for nuclear risks often are.

In fact they cover nuclear liability arising from a significant nuclear event occurring in one or many nuclear power plants around the world, covering approximately 25% of all existing worldwide nuclear plants. So the coverage is broad geographically.

On the specific liabilities covered, these nuclear ILS bonds would pay out once nuclear liability occurs, irrespective of the cause and so would therefore include perils such as cyber risks.

This is again more of an all-encompassing coverage than is often seen in traditional insurance and reinsurance markets for nuclear liability risks.

The investor behind these transactions is breaking new ground, both in the way it is approaching offering insurance risk transfer to corporate sponsors in this novel way, and in the extent of coverage it is making available to nuclear plant operators.