Nuclear liability risks ILS deal transacted on a direct insurance basis

Artemis understands from sources that a ground breaking insurance-linked security (ILS) transaction has been completed featuring nuclear plant liability risks that were transferred direct to an investor in a private cat bond-like format.

We’re told that the arrangement featured an ILS investor working directly with owners of nuclear power plants, entering into a risk transfer contract structured using a debt instrument to enable it to take on risks associated with nuclear incidents, across a number of plant locations.

The structure is really an ultimate net loss type trigger, we understand, with default of the debt investment, and so payouts, 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.

We understand that a payout would only be due should the liability arising from a nuclear event be above a pre-defined trigger point, much as you’d see in a catastrophe bond or other ILS structure.

The risk itself is intriguing, as nuclear risks are not common (if transacted at all) in the insurance-linked securities (ILS) market, and nuclear liability risks even more rare even in re/insurance markets. But we’re told this ILS transaction also covers the nuclear power company against terror attacks, as well as accidents, explosions and other potential impacts, which is without doubt a first in the ILS marketplace.

Another first is the fact that this transaction was transacted directly between an ILS investor and the nuclear power plant operators, essentially making this a corporate ILS or private cat bond type deal.

With that in mind, the ILS investor is providing insurance coverage to the ceding company, rather than the more typical provision of reinsurance or retrocession that we see in the ILS market.

A debt issuance was likely an efficient way to meet the bilateral needs of the risk transfer contract, while offering an asset that met the investor’s portfolio needs.

So here we see the insurance-linked securities (ILS) structure offering an insurance coverage that the nuclear power plant operator may not have been able to get in the traditional markets.

The coverage will provide capital to the cedent, contingent on an event occurring causing liabilities above the pre-defined threshold, which will be a valuable source of business interruption, emergency cash, clean-up and recovery capital.

The investor will have benefited from a true diversifying peril, as nuclear liability risks are far from common, as well as (we’d imagine) an attractive return.

As ever, it’s encouraging to see new risks entering the ILS market, it’s encouraging to see transactions supporting corporate insurance or risk transfer needs, and it’s encouraging to see a sophisticated ILS investor offering a product with true risk transfer benefits behind it.