Swiss Re Insurance-Linked Fund Management

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Nuclear liability ILS deals renewed, as investor commits again


A significant institutional investor has again committed to supporting nuclear liability risks in insurance-linked securities (ILS) form, with the renewal of two deals covering risks of corporate nuclear power operators in a format considered akin to a private catastrophe bond.

nuclear-plant-liability-ilsThese private nuclear liability risk insurance-linked securities (ILS) transactions first came to market in 2017.

They were considered ground-breaking, not just for covering nuclear liabilities, but also as they were were transacted directly between the nuclear corporates and a large institutional investor, as we explained at the time.

The two nuclear liability ILS deals were then expanded and upsized for 2018, as we again explained, further demonstrating that appetite does exist among ILS investors for a risk such as nuclear liability, if the structure and terms of the deal are suitable.

These transactions remain relatively unique in the insurance-linked securities (ILS) space for a number of reasons.

Again, it’s not just the risks they cover, being nuclear liability exposures, but it’s because they have been directly transacted between a nuclear corporate and an institutional ILS investor, so could be considered insurance rather than reinsurance arrangements.

The ILS investor behind the transactions works directly with the owners of the covered nuclear power plants and effects the arrangement by entering into risk transfer contracts that have been innovatively structured around a debt instrument and then securitised, presumably using a cat bond transformer-like vehicle.

This enables the institutional ILS investor to assume liability risks associated with nuclear incidents, across a number of plant locations in these deals.

We can reveal that the two transactions have both been renewed for up to another five years, effectively extending the coverage for the nuclear plant owners at similar terms and transaction size, we’re told.

As before, the underlying structure is really an ultimate net loss trigger, so a payout would only come 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.

A default of the underlying debt investment would be triggered based on an event occurring at one of a number of nuclear power plant locations, that caused liability to arise.

There is an element of counterparty credit risk to this, given the use of a debt or loan instrument, but we understand the investor gets compensated for taking that on.

The arrangement therefore avoided the use of a special purpose vehicle, with minimal third-party service provider involvement and so documentation is far lighter and therefore the risk transfer is delivered in a more cost-effective manner, we understand.

The institutional investor treats these arrangements as similar to a private cat bond format, providing it with an effective way to access a diversifying source of insurance-linked returns, from a completely unique risk that is rarely available in ILS markets.

The investor also acts as an originator, having cultivated the relationship with the covered nuclear operators, we understand.

The deal sizes haven’t changed and so we assume there is still around $40 million of capital backing these nuclear liability ILS transactions.

The underlying 5-year transaction features terms that include annual risk resets, offering flexibility and the ability for more operators or plants to be included in the coverage at future dates.

It’s important not to understate the ground-breaking nature of the coverage here either, as it really is less typical of the ILS market, but this is an exposure that requires significant capacity globally.

In fact, we previously wrote about the potential for the ILS market to get behind global nuclear third-party liability (NTPL) coverage needs, when an EU sponsored study concluded it could be a huge opportunity.

These specific nuclear liability ILS deals cover multiple potential causes of liability, so can provide an effective insurance replacement for, or complement to, nuclear plant operators and can also be less restrictive than terms for insurance or reinsurance for nuclear risks often are.

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

Specifically, these nuclear ILS bonds could pay out once nuclear liability occurs, irrespective of the cause and so would therefore include perils such as cyber risks and even terror events it seems.

It’s important to stress that this is a more all-encompassing coverage than is often seen in traditional insurance and reinsurance markets for nuclear liability risks, so a significant opportunity for nuclear plant operators and their brokers to tap into, should they choose.

Other corporates may also look to the simple and efficient way this type of deal is structured, as well as to the appetite of the investor to provide risk transfer capacity, which presents an opportunity to large insurance buyers, we’d suggest.

Similarly, other large investors may also find the concept intriguing, as many will already have relationships with corporates that require significant risk transfer and you could see other classes of investor, from private equity, to alternative risk bearing, and pensions, seeing this as an attractive way to structure direct risk transfer arrangements between themselves and ceding companies, enabling them to get better paid for bearing the risk.

So, the fact these nuclear liability ILS arrangements are directly transacted between a major ILS investor and the corporates shows how ILS backed risk transfer capacity could be made available more directly to corporates around the world.

To us, that suggests global corporates should perhaps cultivate relationships with the major investors in ILS more directly, to take advantage of the appetite for supporting risk, while also educating their investor partners on what could be possible with a little innovation.

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