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By Dan Reynolds

The media storm that assailed the nuclear power industry when an earthquake and tsunami struck Tohoku, Japan, in March landed a heavy blow to the future of nuclear power.

But with a strong nuclear underwriting performance history, those that insure the 104 active nuclear reactors in the United States haven't lost their faith in the industry or in the domestic political will to support it.

"The political planets are in the best alignment that they have ever been," said Michael Cass, general counsel for the American Nuclear Insurers, a joint underwriting association of U.S. insurance companies in Glastonbury, Conn.

Cass points to the loan guarantees and tax credits extended to the industry under the Bush administration. The Obama administration, looking to expand the nation's alternative energy options, is looking to expand those incentives.

Those in Washington, D.C., seeking to broker an energy future that is less dependent on foreign oil, burns less coal and produces fewer carbon emissions, see such political olive branches as progress toward a smaller national carbon footprint.

In August, the Nuclear Regulatory Commission issued a final safety evaluation report that represents one more step toward the licensing of two additional latest-generation AP1000 nuclear power units planned for construction at Plant Vogtle, the home of two existing nuclear power units near Waynesboro, Ga. Those two new units are among 28 nuclear power units whose prospective operators now have licensing applications in front of the Nuclear Regulatory Commission.

For existing nuclear plants, American Nuclear Insurers provides capacity of $12.6 billion for third-party liability claims for reactors in the United States. The reactors generate 20 percent of the electrical generation capacity in this country.

The coverage is a requirement of the Price-Anderson Act, which was enacted in 1954. The law required that U.S. licensees of nuclear power facilities maintain financial protection equal to the maximum amount available in the private insurance market.

The world's worst nuclear disaster at Chernobyl in the Ukraine in 1986 resulted in the deaths of 31 workers from acute radiation sickness. More than 100 workers were hospitalized with radiation sickness. Birth defects attributed to the accident have affected hundreds of children born since the disaster.

Although the damage and radioactivity release at the Fukushima Daiichi power plant was scary, no workers died in the releases of radiation at Fukushima. The March 11 tsunami knocked out the diesel-powered cooling system and after the electric generators ran out of power, reactors overheated causing a meltdown and radiation release. Workers had to go into the plant with fire trucks to cool the reactors.

Opponents of nuclear power have rallied around the Fukushima incident and renewed calls to look at energy alternatives. The nuclear power industry already faces as much political risk as any other energy source, if not more so. Witness the declarations from Germany and Switzerland.

This spring, after Fukushima, Germany declared that it would abandon nuclear power by 2022. Germany has 17 reactors and is shutting down eight of them immediately. It plans to shut down the remaining nine by 2022.

But a colleague of Cass's said he has seen Germany make statements before about its use of nuclear, and has watched that country reverse itself.

"They turned around the first time," said Tom Wolff, a vice president of engineering for American Nuclear Insurers. "And I'm not so sure that they won't slow down their phase out on this one."

With nuclear plants being built in Finland, Czechoslovakia and France, Cass said that Germany, Europe's biggest economy, may be passing the energy generation buck to its neighbors.

"So Germany, if they choose to be a net importer of nuclear power, I guess they can say they are nuclear-free," Cass said.

Switzerland has also voiced a desire to get out of producing nuclear energy, but Wolff said he wasn't so sure about the degree of political willpower there, either. "It wouldn't surprise me if down the road they find the political willpower to extend licenses versus phasing them out," Wolff said.

After all, Switzerland gets 40 percent of its power from nuclear sources. In terms of the world fleet, the plants in Switzerland and Germany represent a small portion of the total. If every nuclear plant in Germany and Switzerland were shut down tomorrow, gross written premiums for insurers wouldn't be affected all that much.

"So you do the math," said veteran energy broker Marshall Nadel, a Dallas-based managing director with Aon.

Even Japan, which has such devastating emotional scars from the dropping of the atomic bombs on Hiroshima and Nagasaki in World War II, and which suffered through this most recent tragedy at Fukushima, stands to lose a great deal economically if it shuts down its nuclear fleet. "A complete shutdown of the Japanese fleet would be detrimental to the Japanese economy," Wolff said.

From the perspective of insured losses, the nuclear industry has been a very safe place for insurers. From its inception in 1956 through 2010, the American Nuclear Insurers consortium has rung up a combined ratio in its liability program of 88. That number includes premiums that are refunded to policyholders under an industry credit-rating plan, thus, the consortium's effective loss ratio in liability through 2010 is 74 percent.

The meltdown of a reactor at Three Mile Island in Pennsylvania in 1979, the most notorious nuclear incident in United States history, represented a $300 million property loss to the American Nuclear Insurers.

Of a $140 million third-party liability cover that ANI had on Three Mile Island, Cass said the consortium spent roughly $70 million on losses and defense of claims. As with many claims, Cass said much of that expenditure went to legal defense costs.

Chernobyl was an uninsured loss. The owners of the Fukushima-Daiichi plant, Tokyo Electric Power Co., had cancelled their property policy seven months before the event. On the liability side, the earthquake and tsunami were excluded perils.

So, to date, nuclear power generation has not been a place where domestic insurers feared to tread. But there is something afoot that is just as much a retardant on the construction of new nuclear plants as political will.

A moribund economy is a factor that has slowed the construction of nuclear power units. Demand for electricity is not what was five years ago and cheaper domestic natural gas is competing with nuclear power as a low carbon emissions fuel. The nuclear units also are expensive to build and face an exhaustive approval process, which has helped lead to an aging American nuclear power fleet.

According to the Nuclear Regulatory Commission, 52, or half of the domestic operating nuclear power plants are between 30 and 39 years old. Because of economic factors, operator malfunction or local political pressure being brought to bear, plants in the United States have had license renewals denied. Other plants have been decommissioned or are in the process of being decommissioned.

The insurance world is paying attention to Salt Lake City-based EnergySolutions, which is decommissioning the Zion nuclear power station in Zion, Ill. The plant was shut down, perhaps prematurely for economic reasons, said Dan McGarvey, the Greenville, S.C.-based chairman of energy, mining and power for global insurance broker Marsh.

"There is no regulatory mechanism for coming out of safe store," McGarvey said.

"Once you have told the regulators that the plant is down there is no way to come back," he said.

Under U.S. law, nuclear power plant operators are required to establish decommissioning funds, paid for by tariffs on rate payers, which are to be kept intact to cover the cost of decommissioning a plant.

"The idea is to invest in the life of the plant and then be ready for decommissioning the day it shuts down," McGarvey said.

The problem is that even though utilities may have substantial amounts of money in the fund, between $400 million to close to $1 billion in some cases, nuclear unit operators in the United States haven't had much experience in decommissioning nuclear power plants.

Utilities also have found daunting the cost of tearing down the plant and paying the fees for disposal of nuclear waste. That is where EnergySolutions comes in. The company owns a disposal site in Utah and doesn't have to pay disposal fees. It has years of expertise decommissioning plants in Europe. The company couldn't respond to requests for comment before deadline.

McGarvey said the industry is keen to follow the outcome of the EnergySolutions Zion project. "They would love to do this for other clients and I think a lot of people are watching this," he said.

In the case of the Zion plant, any funds left after decommissioning would have to be returned to rate payers. Utility companies that face the decommissioning of a plant, as attractive as they might find the EnergySolutions approach, still find themselves in a bind, McGarvey said. Do they move forward with decommissioning now or do they wait? "Waiting makes a lot of sense because radiation gets lower every year," McGarvey said. Technology around decommissioning keeps improving, so the longer a power plant operator waits, the more smoothly the decommissioning process is likely to proceed, he said.

But acting now avoids the costs of having to babysit a dormant plant that is in safe store. In the case of the Zion plant, according to the New York Times, the cost of monitoring the dormant plant for Commonwealth Edison, now part of Exelon, was $10 million per year.

For his part, Wolff thinks that what EnergySolutions is doing has potential as a business model. As a representative of the insurers who hold the third-party liability policies on the plant, Wolff said he has worked closely with EnergySolutions on the best practices for safely disposing of radioactive materials. "I am hopeful that we will get pretty comfortable as they remove the major source term (industry speak for radioactive material) from the site," Wolff said.

Cass said it remains to be seen if what EnergySolutions is attempting will be profitable.

"As we understand it, this is the first time this type of approach to a facility decommissioning has been taken. It remains to be seen if it will be successful," Cass said.

DAN REYNOLDS is senior editor of Risk & Insurance®. He can be reached at dreynolds@lrp.com.

December 1, 2011

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