ILS capacity can support nuclear third-party liability risks: EC study

A European Commission study looking at the insurability of nuclear third-party liability risks (NTPL) and availability of capacity to support them, found that insurance-linked securities (ILS) market capital would be available, under the right structures and terms.

The European Commission study on nuclear third-party liability risks was undertaken during 2018-19 and one important aspect of it was looking at how to solve the issue of lack of capacity available in traditional insurance and reinsurance markets.

That brought the insurance-linked securities (ILS) market into focus, as well as instruments such as catastrophe bonds, as the team running the study wanted to find out if capital markets sources of risk capacity and ILS funds might be willing participants in future nuclear third-party liability risk transfer arrangements.

Nuclear liability risks do feature in the ILS market at times, but generally in very bespoke and private transactions.

We covered a ground breaking insurance-linked security (ILS) transaction back in 2017 that featured nuclear plant liability risks that were transferred direct to an investor in a private cat bond-like format.

That transaction was also renewed a year later and upsized, demonstrating that appetite does exist among ILS investors for risks such as nuclear liability, if the structure and terms are suitable.

After speaking with market participants and analysing the ILS market, the study authors identified that “considerable new capacity could be available” in the ILS market for the transfer of nuclear third-party liability (NTPL) risks.

In fact, they concluded that as much as $1 billion of capacity could be made available for nuclear liability ILS deals, but with some important caveats.

Critically, the risks must be understood and packaged in such a way as to make it compelling, the authors said that, “correct design of this mechanism will make the difference between success and failure of any new NTPL product.”

They further concluded that, “It is also clear that the scale of the capital markets represents an exciting opportunity to deploy more private capital to the NTPL exposure; however, it must be structured correctly and be provided at an acceptable cost to ensure the fine balance between encouraging or discouraging the commercial exploitation of nuclear power is maintained.”

The attraction of the ILS market is that it could perhaps provide “orders of magnitude greater capacity than currently available,” the authors explained.

But the main issue may be cost and in finding a structure compelling enough, while the study authors also noted that to get enough ILS investors to support a nuclear liability ILS deal, it would be necessary to source “substantial co-(re)insurance participation from traditional markets to help build confidence.”

The study also goes into some detail on potential product solutions, focused on mutualising the risk and tapping the capital markets in some form for reinsurance capacity to support it.

As the ILS market becomes increasingly sophisticated, it seems likely this type of catastrophic risk will find a level of support from specialist ILS underwriters and investors, as the opportunity to provide reinsurance capacity to back nuclear industry risks would likely add a compelling diversifier and source of return to strategies willing to step outside of the natural catastrophe sphere.

The study report is available via the European Commission website here.