Best’s News & Research Service - November 14, 2003 05:11 PM (EST)
Swiss Re Warns of Flaws in Nuclear Exclusion Language
ZURICH, Switzerland //BestWire// - Inadequate policy language and insufficient legislative cover might leave property insurers and reinsurers exposed to nuclear risks that many in the industry might have assumed they were shielded from, according to analysts at Swiss Re Group.
Flaws in policy language and laws that fail to take insurance risks properly into account have existed for several decades, but the Sept. 11, 2001, terrorist catastrophe and subsequent re-evaluations of risk within the industry are throwing new light on the problem, Swiss Re experts said in a new report, "Nuclear risks in property insurance and limitations of insurability."
Swiss Re had been researching and assessing the industry's exposure to nuclear risks for several decades and had always been concerned about possible flaws in policy and treaty language concerning nuclear exclusions, said Georges Galey, an engineer in Swiss Re's group product management division and a co-author of the report. "Sept. 11 increased our awareness that we have some very catastrophic risks at hand," he said. "The endeavor to check clauses, terms and conditions were reinforced since."
Werner Meier, head of Swiss Re's group product management division, said it's very difficult for the industry to assess how much of a loss, in monetary terms, it might be exposed to, partly because of the same uncertainty regarding what is covered or not covered. He added that primary insurers "do not have as much accumulation exposure" as reinsurers to such possible risks, meaning that data on exposure on the primary side are somewhat incomplete.
Swiss Re's findings, along with other industry studies, found that, in the United States, laws and industry practice related to nuclear risks, in many cases, haven't been updated since the 1970s. "Much to our surprise, no one in the United States has taken up the issue," Meier said.
Flaws in language related to nuclear risks had been recognized and discussed as far back as the late 1980s, said Galey. But the lack of actual loss events related to nuclear energy meant there was little sense of urgency to attack the problem. What changed, said Galey, is the frightening specter of terrorists' use of nuclear material for possible attacks. "It was when we began to think about the possibility of nuclear terrorism, when some or most of these flaws became more important," he said.
Even before the Sept. 11 shock, the collapse of the Soviet Union beginning in 1989-and the enormous amounts of nuclear material stored in former Soviet states and inadequately protected-made it clear that nuclear-based threats were going to get more serious, said Galey.
Swiss Re's study found that "one of the most perilous shortcomings in traditional property insurance and reinsurance concerns inadequate nuclear risk exclusions." According to the report, gaps in property insurance and reinsurance have sparked efforts to establish "flawless exclusion clauses in the relevant treaties."
Galey said there are possible flaws in nuclear exclusions in every market, partly because the nature of nuclear-related risks can't be known completely. Multinational companies and parent companies with many subsidiaries may use a variety of property insurance and reinsurance coverages, with varying language related to nuclear exclusions, said Galey. "We cannot possibly know for sure the totality of flawed wording in every scenario," he said. "They may appear in all-risks wording, manuscript wording, certain standard wordings."
In its report, Swiss Re focuses on the widely used London clause known as "NMA 1975a," which addresses nuclear-energy risks exclusion. Considered the gold standard of nuclear-risks exclusion language, the clause nevertheless only addresses exclusions related to accidents in the context of peaceful use of nuclear energy.
The London clause and similar reinsurance agreements often add a war exclusion supplement, but terrorism is a different matter. "After all, terrorism is at the seam between war and peace, and if terrorists obtain and use nuclear material, this is not addressed by the existing set of exclusions," the Swiss Re report said.
Galey said the London clause is "a very good clause" but might not be flawless even in the scenarios it addresses. "These clauses have never been tested in a court of law," he said.
Gaps in nuclear-exclusion clauses haven't been addressed by the introduction of "various national and private terrorism schemes." For example, in France, insurers are required by law to provide coverage against terrorism in original property policies. That means that exclusions such as nuclear terrorism might be invalid. Also, the use of "dirty bombs," devices designed to release radioactive material through the use of conventional triggers, appears to be covered under certain policy conditions.
Laws introduced since the Sept. 11 event and designed to address insurance coverage for terrorism-related losses haven't added new problems to nuclear exclusions, said Galey-the French law mentioned above dates back to the mid-1980s. But new legislation also hasn't done anything to correct the existing problems, either.
Flaws in nuclear exclusions vary from jurisdiction to jurisdiction, depending on local law and industry practice. In the United States, certain "fire following" requirements in property coverage leave insurers and reinsurers open to any event that causes fire damage, even if the trigger event is excluded, said Galey.
Swiss Re proposes in its report that new wording in reinsurance treaties more accurately and comprehensively address the exclusion of nuclear energy risks. Wording in insurance contracts will also have to be refined to nail down nuclear exclusions. Swiss Re also said laws in some jurisdictions would have to be amended to "correct the situation for the insurance industry."
"The first thing we need to do is get the reinsurance treaty language corrected," said Galey. In Swiss Re's proposed exclusion language, a letter "b" would be added to NMA 1975a that would zero in on losses caused "directly or indirectly" by nuclear reaction or radiation or radioactive contamination "regardless of any other cause contributing concurrently or in any other sequence to the loss..." For "any other cause," read terrorist action.
"We are just as interested in establishing better exclusion clauses for primary insurance contracts as well," said Galey. "For that, we are interested in working with our clients where necessary, to change legislation where needed." One example of desired change in law is the "fire following" requirement in standard fire insurance policies in the United States, Galey said.
The financial strength of Swiss Re Group is rated A+ (Superior) by A.M. Best Co.
(By David Pilla, senior associate editor, BestWeek: David.Pilla@ambest.com)