India explores catastrophe bonds for nuclear liability issue

According to newspaper reports the Indian government has been considering a catastrophe bond type structure, possibly combined with a sovereign guarantee, in order to overcome a fear foreign suppliers have over its nuclear liability laws.

The issue has come to the fore as a deal on nuclear power development between India and the U.S. is looking at risk due to foreign suppliers fear over a strict liability law that India introduced.

As Bloomberg explains, the law, which was introduced by the Indian Parliament in 2010, has stalled foreign investment in India’s nuclear power industry. This was on the heels of the Indo-US agreement that was supposed to see India separate military and civil nuclear programs with the International Atomic Energy Agency supervising the civilian program.

The expectation was that investment would flow into India’s civilian nuclear power industry and that foreign suppliers and operators would enter and open up the market. The liability law has stalled progress.

The law puts liability for any nuclear plant accident related to faulty or defective equipment on the supplier instead of the plants operator. A second clause in the same law means that the supplier faces potential unlimited liability, as a result of which foreign, particularly U.S., suppliers cannot get insurance to operate in India’s nuclear industry and there is no reinsurance protection either.

As a result, the idea of using some sort of catastrophe bond, or a blend of catastrophe bond with a sovereign guarantee, has been raised as a possible way to transfer some of this liability risk away from the suppliers, according to sources in the Indian government.

India’s Insurance Regulatory Development Authority (IRDA) raised a cat bond as a possible solution, likely due to the contingent nature of the capital a cat bond structure can provide and due to the way a transaction trigger could be put together.

In essence the Indian government is seeking a way to enable foreign suppliers to enter their civil nuclear power market, with a source of protection and insurance in place against accidents and disasters and the resulting liability risks.

The Indian government has looked at domestic re/insurer General Insurance Company (GIC) providing cover, but this article in the Times of India suggests that the firms capacity is too limited. At the same time India discounted asking foreign reinsurers to provide the capacity and looked at a nuclear risk pooling facility, but still the resulting pooled capacity would be insufficient.

So a traditional reinsurance solution could not be found to date and so the attention has turned to how to provide a big enough supply of capital, which would be made available on contingent terms after an accident or disaster, enabling foreign suppliers to be protected under its capacity. Catastrophe bonds are a possible answer according to IRDA and when wrapped with sovereign guarantees may be able to instill the confidence needed to entice foreign suppliers to the Indian nuclear market.

It’s unlikely that the actual tail of the potential liability from a nuclear accident or disaster is what is being discussed here. It seems rather more likely that the ability to fund a large pool of risk capital, payout from which would be contingent on events occurring, thus enabling the foreign suppliers to be sold an insurance product (and reinsurance to be addressed) allowing them to operate in the country, is really what the government is seeking to address.

It’s fascinating that cat bonds are currently being raised as potential solutions in an increasing amount of government, or international level discussions. Whether the end result would ever be a catastrophe bond as the insurance-linked securities (ILS) world knows it, or whether it would be more of a government issued contingent capital type security, is uncertain.

However, as we’ve said many times here at Artemis, the ability to access the deepest pool of capital, with the potential for liquidity, using a binary or sliding scale trigger to determine the default parameters of a security, could allow for the transfer, financing and hedging of many types of risks.

This isn’t the first time India has discussed cat bonds at government levels and it likely won’t be the last.

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

– 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.