Proceedings of the Standing Senate Committee on
Energy, the Environment and Natural Resources
Issue 19 - Evidence - November 1, 2005
OTTAWA, Tuesday, November 1, 2005
The Standing Senate Committee on Energy, the Environment and Natural Resources met this day at 5:21 p.m. to examine and report on emerging issues related to its mandate.
Senator Tommy Banks (Chairman) in the chair.
[English]
The Chairman: Honourable senators, today we will hear witnesses from the Nuclear Insurance Association of Canada, specifically, Mr. Steve Hammond, the association's chairman, and Mr. Dermot Murphy, its manager.
For the benefit of our audience, this meeting has to do with the question we have raised in the past in respect of this committee's study having to do with nuclear safety and, particularly, the amount of public liability insurance required, by statute, of all operators of nuclear plants in Canada.
Gentlemen, I am sure you have things to tell us, and we hope you will be amenable to answering our questions afterwards.
Mr. Hammond, please begin.
Steve Hammond, Chairman, Nuclear Insurance Association of Canada: Thank you, senator. Our manager Mr. Dermot Murphy will give you the background of our association and its function.
Dermot Murphy, Manager, Nuclear Insurance Association of Canada: Mr. Chairman, honourable senators, it is a pleasure for the Nuclear Insurance Association of Canada, also known as NIAC, to address your committee today.
Mr. Steve Hammond has been the chairman of NIAC since 1996. I propose to make a short opening statement, following which we will be pleased, Mr. Chairman, to answer the questions posed.
The Nuclear Insurance Association of Canada of Canada was established in June 1958 in response to the need to provide adequate insurance cover arising from the peaceful development of nuclear power in Canada. As an approved insurer of nuclear liability insurance in Canada, as provided for under the Nuclear Liability Act, NIAC provides the statutory coverage required by Canada's nuclear operators, which is currently $75 million.
NIAC is a domestic pool, representing approximately 20 major property and casualty insurers and re-insurers, who operate in Canada. For those risks that require more capacity than NIAC has available, two other international pools are considered as approved insurers to assist with capacity as well as other technical issues. It is through these pooling arrangements that NIAC has access to worldwide capacity that is available for the nuclear energy hazard.
Under the heading of ``current limit,'' of the NLA, the Nuclear Liability Act, over the past several years, we have been involved with the Ministry of Natural Resources with respect to the review of the NLA. Compared to other jurisdictions of the world, the current limit of liability would appear to be inadequate to compensate the public, should a significant nuclear incident occur.
A brief comparison of limits in other jurisdictions also suggests that the current Canadian limit could be amended. For example, in the United Kingdom, the present limit is £140 million. Under the Paris Convention, a recent proposal — within the last 18 months — has been tabled whereby the liability limit for countries subscribing to the Paris Convention be amended at 700 million. In the United States, at present, they have a two-tiered approach. The first is in the amount of U.S. $300 million, and the second tier by way of pooling fund arrangement is just under U.S. $10 billion.
Many other jurisdictions have varying limits of liability imposed on operators. However, it is noted that the Canadian limit appears low compared to other jurisdictions.
That concludes the opening remarks, Mr. Chairman.
The Chairman: Thank you very much Mr. Murphy.
Senator Angus: As you know this, committee recently visited some of the multinational nuclear bodies in France and Austria, specifically, Paris and Vienna. The subject of nuclear liability was raised, so it is timely that we should hear from you.
I must declare at the outset a bias after hearing, anecdotally, how much this insurance costs and how difficult it is to obtain without exclusions. It might make more sense for government to provide a kind of self-insurance. I would like to hear your comments on that. There is such a range. You say that the U.S. has a primary of U.S. $300 million and excess of up to U.S. $10 billion. Could you give us a sense of what that costs and how practical it is, and then comment on my self-insuring idea?
Mr. Murphy: There are a number of reasons for the requirement that nuclear operators carry liability insurance. Insurers have claims management expertise to handle claims that might arise from a nuclear incident. NIAC and the British pool also conduct periodic engineering surveys of the nuclear utilities to ensure that they are complying with international insurance risk management guidelines in the operation of their nuclear power facilities. Requiring nuclear operators to carry nuclear liability insurance forces them to internalize an important cost of business, the cost associated with the risk that their operations might cause damage to third parties. This, in turn, creates an incentive for the operators to take appropriate measures to reduce the risk in order to keep their insurance premiums as low as possible.
Mr. Hammond: Our membership of the worldwide pooling arrangement, particularly the British nuclear pool, gives us access to international engineers and loss prevention facilities. I suggest that that is a key element that we bring to the table in terms of ensuring that there are appropriate risk management activities at the nuclear plants. We can bring a degree of independence by bringing these engineers from elsewhere in the world.
Senator Angus: Perhaps you did not understand my question, or perhaps you are too smart an advocate of the insurance industry. In either event, I have great respect for both of you.
I will approach the issue in another way. The Canadian statute requires nuclear installations in Canada to carry third-party liability insurance up to $75 million. How much does it cost?
Mr. Murphy: For all the operators in Canada?
Senator Angus: Let us talk about one operator, using the Bruce facility as an example.
Mr. Murphy: I do not have that information at my fingertips. There is an element of confidentiality in identifying specific operators and their associated premiums. I will answer your question, however. For all the operators for all the facilities in Canada the premium is in excess of $3 million. If you were to convert that to an average premium, that is roughly $200,000.
Senator Angus: I find that figure to be low. What kind of exclusions are there and what does it actually cover?
Mr. Murphy: The policy form is as prescribed under the Nuclear Liability Act. I do not have a copy with me. It is voluminous in size and in detail. There are, obviously, the normal exclusions. The point is that it does cover for bodily injury and property damage arising out of a nuclear incident as defined in the act.
Senator Angus: To your knowledge, has there ever been a claim in Canada?
Mr. Murphy: There has been no claim under the liability portion of policies in Canada.
Senator Angus: That goes back to 1958.
Mr. Murphy: That is correct.
Senator Angus: Therefore, the premiums have accumulated and it has been a nice deal for the underwriters, I suppose.
Mr. Hammond: We must look at the type of risk we are running, and clearly it is a catastrophic risk. If we consider this in the same light as earthquakes or other such big events, we do not expect these things to occur on an annual basis. Under OSFI's guidelines, we are moving to manage earthquakes on a 500-year return period, that is, that size of event occurring once every 500 years, and price and reserve accordingly. We hope that there never is a nuclear event, but we are building that premium up for some type of very serious event.
Senator Angus: Is the Nuclear Insurance Association of Canada comprised of the domestic insurers, or does it also include the British pool of whom you spoke?
Mr. Hammond: The members of NIAC are mainly domestic insurers and reinsurers, and the British pool comes on top.
Mr. Murphy: That is correct. Among Canadian domestic insurers is Lloyds. Lloyds operates in Canada and its main market comes from the U.K. To the extent that NIAC, as operators of the pool, can arrange coverage in Canada, we do that.
Senator Angus: I understood you to be an industry association as the Insurance Bureau of Canada is for P&C and general insurance. Do I understand correctly that you are not the insurer for nuclear?
Mr. Murphy: That is correct. We manage the Canadian pool representing approximately 20 property and casualty companies who are licensed in Canada to conduct, among other things, nuclear liability insurance. There is a limit to the capacity available in Canada. At the point that the available capacity is used, we turn to our colleagues in both the British pool and the American pool.
Senator Angus: Is there $75 million of capacity in Canada?
Mr. Murphy: No, there is not.
Senator Angus: You said that there is £140 million in the U.K., 700 million in France, U.S. $300 million primary in the U.S. and U.S. $10 billion excess. There is no capacity for that kind of cover.
Mr. Hammond: When we said that there is $50 million available in Canada, that is referring to a domestic market. One of the underpinnings of the international pool arrangement is our access to capacity from the British pool and the American pool. We are confident that we could pull together $650 million using the capacity from those pools, and that is an accepted part of spreading the nuclear risk around the world.
Senator Cochrane: Am I correct that the Nuclear Liability Act has been in force since 1976?
Mr. Murphy: Yes.
Senator Cochrane: Since then, premiums have been paid by 20 companies.
Mr. Murphy: The premium has been paid by the operators to 20 companies.
Senator Cochrane: Are you the underwriters?
Mr. Murphy: We are the management facility. We have an underwriting individual, and our underwriting strength comes from both the U.S. and the British pools.
Senator Cochrane: I am speaking of Canada now. You have been managing this pool of money, but the operators have been paying annual premiums
Mr. Murphy: Renewal terms are negotiated and several factors determine what the premium will be in any given year, including market capacity and experience within the pool of capital that is involved in the nuclear insurance world.
Senator Cochrane: It is not the same every year?
Mr. Murphy: Not necessarily.
Senator Cochrane: What determines the premium?
Mr. Murphy: Numerous factors play a role. Geographic location might have a bearing. Imagine the exposure in a location such as Pickering, with the hundreds of thousands of people who are domiciled close by, versus Point Lepreau, which is in a remote peninsula area.
The Chairman: Senator Cochrane was questioning why it would vary from year to year.
Mr. Murphy: Market capacity and market premium levels principally.
For example, after the 9/11 incident, it was next to impossible to get terrorism coverage because there was a shrinkage of the market capacity for it. It is a demand-and-supply situation, and every year in or around November and December our colleagues in Britain go to the market to arrange for the forthcoming year.
Based on the experience of those who are providing the capital for the nuclear risk, which is actually part of a wider pool — and we will call it the energy capacity — we are anticipating some difficult discussions this year because the energy pool of capital also includes oil rigs, refineries, et cetera. Our brokers in London have advised us that a very busy time is coming. That may translate to a higher premium base and hence from year to year, it can fluctuate depending on issues such as that.
Mr. Hammond: Perhaps I may add that what we are dealing with is not just a Canadian market; we are dealing with a worldwide marketplace. The hurricanes south of the border have affected the catastrophe reinsurance market, irrespective of the fact that there have been no events in Canada. Once we go outside of Canada, we are subject to those market forces.
To put it another way: The Canadian insurance and reinsurance industry is much too small to carry catastrophic risks of this nature. We have to look to the worldwide market.
Senator Cochrane: What would the premiums be for Pickering, for example?
Mr. Murphy: It is a very sensitive area. I am not in a position in open forum to discuss the specific premiums of a particular operator.
Senator Cochrane: Would you be able to give me a ballpark figure for all of Canada?
Mr. Murphy: Yes. It is just over $3 million. I will say $3.2 million approximately.
Senator Cochrane: Is this pool of money placed with the same pool of money for the U.S. and the U.K. and other places? Are we all going to one pool if anything happens?
Mr. Hammond: Actually, senator that is not the case. The Nuclear Insurance Association of Canada is, in essence, a legal entity that individual insurers operate and actually run a risk. The premiums and losses go back to the individual insurers. For instance, my company, the Royal Sun Alliance, participates in a pool and, therefore, the money flows to us. As a nuclear insurer and a participant in the pool, we hold that money against potential liabilities. Therefore, in the time we have written the risks, we have grown a pool of money.
I would add that, at the present time, the legislation in Canada does not allow us to put that money aside and say, ``That is a premium for nuclear exposure,'' and keep it separate. It comes into our overall operating returns. Some individuals may wish to look at that terms of segregating nuclear funds and holding them separately for such a catastrophe.
Senator Cochrane: I will go back to what our commissioner said when she appeared before us. One of her recommendations was that Natural Resources Canada should begin reparative work on revisions to the Nuclear Liability Act and submit policy proposals to the minister by the end of 2005 in order to advance the commitment to bring forward revisions to the act.
Do you think we need revisions to this act? It has been in effect for 30 years.
Mr. Murphy: Yes, senator. As mentioned earlier, over the last several years Natural Resources Canada has been consulting with all stakeholders, including NIAC and the operators themselves, with a view to bringing forward recommendations to their minister in the matter of policy format and, most particularly, in the matter of higher limits more in line with current international levels.
Senator Cochrane: There have been no incidents, thank God, since 1976. Let us say we did have an accident. Do you think that the people in the surrounding community would be well taken care of?
Mr. Hammond: Certainly, senator, the present limit of $75 million is obviously very low. We have had that discussion, and we have indicated that, as insurers, we are confident that we could put together something like $650 million.
I would add another comment to that: We do not know the size of an event or the long-term bodily injury issues. We are sitting here offering coverage to a limit which is available in the international market. Beyond that, when we look at an event of unimaginable proportions, then that falls into the purview of the government.
Mr. Murphy: If we were to describe the $75 million as coverage ``A,'' for example, when that limit was used up in its entirety, it is expected the government would step in with a coverage ``B'' approach and look after the people that you referred to earlier in your comment.
Senator Tardif: I am interested in other areas that utilize nuclear power such as research reactors and medical isotope producing reactors. Are they included in this plan, and do you cover them? How much of a premium do they pay if they are covered, and how do they fit into all of this? There are other areas that are utilizing nuclear power, are there not?
Mr. Murphy: Yes. Operators of research reactors and medical isotope producing reactors are designated as nuclear installations under the Nuclear Liability Act, and they are required to carry insurance.
However, recognizing the lesser exposure, their requirement to carry liability insurance limits range from $500,000 to $1.5 million, more in line with the exposure represented by a lesser risk, if you will. I cannot give you the premiums off the top of my head, but they are significantly less.
Senator Tardif: Is the $1.5 million for the total of the organization's utility?
Mr. Murphy: No. It would be the limit that a particular single facility would put in place under its policy. A nuclear power operator, as it is called, has a requirement under the act for $75 million. One of these lesser exposure isotope facilities, research reactor facilities, would have anywhere from $500 and $1.5 million as determined by the act. It would, obviously, have a commensurate reduction in premium.
The Chairman: It is a proportionate reduction?
Mr. Murphy: I do not want to mislead the committee. At this time, I do not have that information.
Senator Tardif: Has there ever been a claim on that?
Mr. Murphy: I would suggest not, senator.
Senator Tardif: Are you not positive?
Mr. Murphy: There has not been a significant nuclear incident in the 40 years or so that the NIAC has been in place.
Senator Gustafson: My question was possibly answered by Mr. Murphy. Is there any insurance at all for terrorist activity? If so, would you elaborate on that?
Mr. Murphy: Yes. I would like to step back in time to the unfortunate events of 9/11 in New York City.
In the immediate policy year following 9/11, NIAC was able to maintain terrorism as a risk that was covered within the policy. In the following year, no terrorism liability coverage was available and at that point the federal government stepped in to cover that risk, as I believe they may have done for the airline industry. In subsequent years, and it prevails today, we have come up with an approach whereby NIAC is able to provide 20 per cent of the required terrorism coverage and the federal government provides 80 per cent.
In general terms, availability of terrorism coverage has come back somewhat from the days of 9/11. It is still not an overly attractive proposition to underwriters, but that is dependent on location and what events might occur. We have seen terrorist acts in the U.K. and elsewhere in the world. Fortunately we have not experienced that in this country.
Senator Gustafson: If an insurance company commits to support, does that only last for one year?
Mr. Murphy: Yes. These are annual policies that are renewed on an anniversary; typically January 1. That is an example.
Mr. Hammond: The provision of terrorism coverage by a reinsurance company is problematic. It is difficult to estimate a maximum loss. One of the issues that makes it more complex in Canada is that, under ordinary property insurance policies in Canada, insurers are required to provide for fire following terrorism, on house policies and commercial policies. Insurance companies operating in Canada already have this terrorism exposure which we carry on our books and that has a definite knock-on effect of limiting our capacity and our appetite for terrorism in other areas.
If you look at other countries, with the exception of the U.S.A., most such coverage is not provided by private insurers, but either by the government or back stopped by the government. Therefore, our participants are insurers who participate in the pool, and they have to look at what we do in Canada as ordinary business before we start making decisions on providing terrorism coverage in connection with nuclear.
Senator Adams: I have been at Pickering with the Energy Committee. It is a densely populated area. You say you have $75 million in insurance. If the Pickering plant exploded and there was radiation damage to the area, could the insurance cover the losses? Would those people who lived nearby and who suffered radiation poisoning and had to be hospitalized be covered? Is that covered under the insurance?
Mr. Hammond: Yes, senator, the liability policy of the operator will pick up the bodily injury and property damage due to an event at the operator's plant.
Senator Adams: That $75 million is only for operators. Are you saying you can come up to $300 million on top of that?
Mr. Hammond: We can certainly provide that capacity using world-ready sources.
Senator Adams: What happens if it is over $300 million?
Mr. Hammond: At that point, if the government or regulatory authority asked us about a higher figure, we would certainly go into the international pools and see what is available.
Mr. Murphy: Our early indications are that limits in the $650 million are indeed available, subject to the condition that the scope of cover is not materially changed from what it is today. In other words, an underwriter will indicate that, if the limit is prescribed under the NLA or its replacement, all things being equal, that limit will be available. Additional capacity items are also available.
Senator Adams: If, as a result of a nuclear incident a person could no longer live in his home, would the insurance payment cover the cost of buying a new house?
Mr. Hammond: That would be covered by the liability policy of the operator.
Senator Cochrane: What would the premiums be for this higher level of coverage?
Mr. Murphy: If we were to look at $600 million or $650 million — we are talking an eight-fold increase, 8.6 or something — in terms of the market premium indication, subject to the qualification that all things remain within the scope of cover as presently understood, we are talking somewhere in the order of four to six times what is presently paid.
The Chairman: Insurance is a bet. That is what insurers are making with people who are insured, I believe. Am I right? It is a bet with odds. I just want to make sure that we understand clearly that the limits we are talking about, presently $75 million or $1.5 million for a smaller operator, which may or may not be expanded according to the act, are for each operator. If there were 10 operators and 10 events — and we are talking about scenarios that are actuarially unlikely — and if they all happened at the same time, would we have bumped the total layout to $75 million?
Mr. Murphy: If an event were to happen at Point Lepreau concurrent with an event at Darlington, Pickering and Bruce, yes, there is a limit of $75 million for each event.
The Chairman: Would they be aggregated?
Mr. Murphy: That is correct.
The Chairman: The one question that we have asked a few times and it is theoretical, and underwriters or those who represent them are the wrong people to ask this question, but some professions have determined that the cost in this case is $3,267,000 a year at the moment. The limit of coverage is such that it is not a particularly good bet. Some professional groups, lawyers and doctors for example in constituencies, have decided to self-insure. In other words, they take the equivalent of $3 million a year and they segregate it and hope that it is never used. The government, by the way, is on the hook for the $75 million and the first dollar and every dollar after that of determined liability in the event of a catastrophic event. Does it continue to make sense for the government to pay premiums for coverage at the present level? In other words, if the government decides not to substantially increase the level of liability insurance, would it not make more sense for the government to say, we will eat the whole thing because in the event of true catastrophic event the liability would be significantly more than $75 million? If we are going to be on the hook, for example, to the tune of $500 million, why bother paying premiums on $75 million? What is your reaction to that argument?
Mr. Hammond: Mr. Chairman, clearly, the viewpoint of self-insurance, whether it be NIAC or any other product, can be considered. From our perspective, with private insurers, we do certain things. One consideration is price. We have access to price and methodology. The government can transfer the risk to us and know at that point in time that it will not be involved in a small event, that there will be international capacity, that a company can protect $600 million to $650 million, if we are asked to do that.
As the insurance industry, that is our business. We are in the business of paying losses like that. I am not sure whether an association or something else is necessarily in the business of paying those kinds of losses.
The Chairman: It is not at the moment. This is purely hypothetical.
Is it possible in the view of your actuaries and those people who examine the nature of risks that a large event at a university facility — nonetheless with a nuclear generator — could have a greater liability effect than a small event at Pickering? Theoretically that is possible.
I know you said that lower coverage is required on medical isotope producing reactors because those present a lower risk. Is it not the case that a nuclear incident, if the worst were to happen, could be just as problematic in the middle of a university as it could at Point Lepreau?
Mr. Hammond: Neither one of us is an engineer. At that point, obviously, we would have a discussion with our engineer.
The point you are making is that you could have a release of heavy water which does not contaminate or is contained and does not become a big event. As insurers, if there is any concern about a university type facility not having sufficient limit, then we are here to provide the higher limit. That would be our response.
Senator Angus: Senator Banks was trying to get to the same point I was trying to get at. As you say, ``We are in the insurance business. Our business is to provide this product. If you raise the limit to $600 million, or whatever, we will provide the cover. We can find the capacity. That is our business. It is good for you to deal with us because we provide these services of risk management.'' You are doing your job in saying that.
Notwithstanding that, because you are experienced in the area, we are trying to elicit from you a response to: What if the government decided to make its own bed, as they had to do post 9/11 with antiterrorism insurance? Every underwriter placed an exclusion in their coverage. Air Canada and Delta could not fly unless they had anti-terrorism insurance. They could not get it, so the government put it up. They had to put up a bond, or whatever. As it turned out, luckily, there were no claims.
The chairman and I are on the same wavelength. Do you have a view? Notwithstanding your commercial interest — and you are doing a very good job in advancing it — is it totally preposterous as a matter of public policy to consider, perhaps, the government taking this over?
Mr. Murphy: Do you mean taking it over in its entirety?
Senator Angus: Yes, or certainly the excess.
Mr. Murphy: I have had informal discussions with the operators. Hypothetically, we have cast the question: What if the limit goes, under the prescribed legislation, to $600 million? Would you wish to invest all of your resource in buying that limit through an insurance mechanism? Informally, I have been advised that the answer is no. They say, ``We believe in insurance up to a certain level, and would perhaps consider other forms of acceptable protection thereafter, which might include self-insurance.'' That would have to be evidenced by a strong balance sheet and a viable operator. It may include a financial instrument, or it could be a combination of both.
In these informal discussions I have had with several of the operators, they recognize the value of insurance because they are paying a small premium relative to the limit of liability. I could be challenged on that from time to time.
They certainly believe in insurance being part of the possible future equation to be supported by either a vehicle, such as self-insurance which will have to be reflected in a strong balance sheet, or letters of credit, or some other financial instrument acceptable to the regulators. The potential is a combination.
Senator Angus: As legislators and advisors to government on public policy matters, the committee has to see the bigger picture. Let us say it is in the public interest, in our view, and perhaps in the government's view, to have a more active and bigger nuclear industry for the supply of power because of cost and environmental considerations. We saw what had happened in France when we were over there. That would mean it was deemed to be in the public interest to encourage new operators to come into the game, assuming that it was private enterprise that was doing it as opposed to Crown corporations being in the business. It seems to me a corollary of that would be to render it economic for people to get into business so that they could furnish the power at costs that are not prohibitive and that are competitive with fossil fuel power and the like.
As a result of recent events, we see that we are right in that approach. The price of fossil fuels is sky high. Natural gas prices are high. People are starting to rethink the nuclear option, notwithstanding the environmental worries about waste and so forth. This is why we went on this fact-finding mission to Europe; and it is why we wanted to have this discussion with you today.
In France, there is something in the order of 38 reactors. There are a number of private operators. The sense we got from them is that they are not paying insurance premiums through the roof. They may have basic primary coverage to protect them against basic claims.
For the catastrophic events — the 9/11s and terrorism — I believe there is another option, and I am not one who believes in ``Big Brother'' stepping in. If it is in the public interest to have this source, then it seems to me one could make a strong argument for the government to say that it will underwrite up to a point. There could be a cap for a claim in excess of $75 million, for example, or maybe it could be for anything over $5 million. Does that make any sense?
Mr. Hammond: Setting a point about expanding the nuclear power option is something that we face in Canada. NIAC could play a big role in that area. In respect of the structure, we talked about risk management and running a limit, whether it be $600 million or $650 million at the first part of that program. At that point, whether it is NIAC or any other insurance mechanism, we bring other risk transfer skills. I take your point that above that, the catastrophic loss is responded to by governments, whether it be a hurricane or nuclear related.
When we look at companies and how they operate, it is beneficial to nail down costs, particularly in respect of risk management. Certainly it is beneficial for NIAC to provide the first part of the coverage. That mechanism ensures that risk management is high on the agenda and that the operator can clearly see the costs attached to it.
Senator Angus: No one argues that point with you. You are such a good advocate that I will buy more shares of Royal Sun Alliance.
One other point during our trip quite surprised us and was contemporaneous with our visit. I am referring to a UN- sponsored study into the ultimate effects of Chernobyl. A gentleman came into the room, looked us in the eyes and said that the risks have been grossly exaggerated. Apart from the direct damage at the time of the blast for those persons in close proximity to the occurrence, he disregarded much of the feared effects on future generations, such as birth defects, et cetera. Therefore, it seemed to us that perhaps these risks in requiring some poor operators to carry insurance of $1 billion are unreasonable. Could you comment?
Mr. Hammond: Whether it is nuclear insurance or any other kind of liability insurance, look at big companies and you will see that they buy big limits for obvious reasons in terms of things going wrong, whether from pollution or nuclear accidents.
The definition of a ``catastrophic event'' is ``all safety measures failing at once,'' which we do not anticipate.
Both Mr. Murphy and I are familiar with Chernobyl because we have read several reports on it. It was a different reactor, but we would be very cautious of those kinds of reports.
Senator Angus: Gentlemen, you are experts in this field. You will recall that following the terrible oil spill of the Exxon Valdez in Prince William Sound, the U.S. enacted a law in respect of ships entering their territory. Subsequently, it has been watered down. In the media, post-Katrina, the U.S. waived the necessity to have this ridiculous amount of insurance.
In terms of public policy, the benefits of producing more nuclear power and the management of environmental fears, my point is that we do not want to come up with something that would scare people away from getting into the business and that would inhibit the growth of the industry. Although we might have double-hulled ships and excellent training for masters and mates, if the insurance is so prohibitive in terms of cost, no one will bring their tankers to the U.S.
Mr. Murphy: I would argue the opposite, to some degree, in as much as limits of $75 million, possibly increasing to $600 million, would allow operators a sense of comfort. Obviously, they would pay the premium and, acting on the recommendations of our pool engineering experts in safety, procedures and protocols that lessen and reduce the risk over and over, they would have little resistance to implementing higher limits in any vehicles, such as a combination of insurance and other risk management approaches available.
Senator Christensen: Senator Angus talked about Chernobyl and the positive presentation that we heard outlining that the effects reported did not present all of the birth defects. The presenter said that this was because of the wind direction. Had the wind been blowing in the opposite direction, the effects would have been totally different.
I have one question about the $75 million that is being carried. Are there categories of events within that policy? For example, if there is a heavy water spill, only up to $10 million will be paid. If it is greater, they will not —
Mr. Murphy: There is no subdivision of the limit.
Senator Christensen: The limit is $75 million and once you exceed that, someone else kicks in.
Mr. Murphy: Prescribed parallels, correct. We pay in line with the terms contained in the policy wording, which is dictated by the Nuclear Liability Act.
Senator Cochrane: Who are your brokers?
Mr. Murphy: The broking facility is Price Forbes, who gains access to the London market, most notably Lloyd's. Each operator has a set of brokers, the specifics of which I am not sure. Our broker in the London market is Price Forbes. They have a specialty practice in the energy sector, inclusive of the nuclear insurance requirement.
Senator Cochrane: Is that the only one to which you relate?
Mr. Murphy: Yes, bearing in mind that we are a not-for-profit association, and we act as an intermediary. We are a recognized insurer under the Nuclear Liability Act. We act as an intermediary between the operators and others, and the market, part of which comes in the form of approximately 20 Canadian companies — insurers and reinsurers — and the pooling mechanisms that afford us access to the British and American pools.
Senator Cochrane: What are your companies in Canada?
Mr. Murphy: I do not have the list with me. Mr. Hammond is Vice-President with Royal Sun Alliance in the underwriting reinsurance area. His company is one of many on our underwriting slip, such as Wawanesa, Zurich, Dominion and most of the mainstream companies that are financially sound and perform within the guidelines as set by the financial regulators.
I would make a point that under the pooling arrangement worldwide, insurance companies commit only what is called ``their net limit.'' They are not permitted to put in place reinsurance in respect of their nuclear writings.
In the case of some of the oil rig disasters — Ocean Ranger comes to mind — there was a problem with that because there was what was called ``spiralling reinsurance.'' Around the globe, companies — reinsurers and primaries — did not realize how much was falling into a certain financial obligation, into a certain pot. That was by virtue of the fact that they were permitted to reinsure.
It is a significant strength of the pooling system on a worldwide basis that the property and casualty insurers who provide capacity do so on a net basis. They do not reinsure the exposure that is dedicated to the nuclear risk. This is one of the most significant strengths of the pooling approach.
Senator Cochrane: Mr. Hammond, do you have something to add?
Mr. Hammond: Not really; I think Mr. Murphy covered it. Essentially, the financial strength is that we put out our net lines, which are very much within the risk appetite of all insurers. That does add to the financial strength.
Senator Cochrane: When we were in Europe — I am not sure if this was Paris or Vienna — we saw nuclear plants erected in areas where all kinds of people were around, right in the centre of the community. I was amazed. In one's mind, the nuclear power plant represents a danger and people should be careful.
Knowing that we have $75 million, what are your thoughts as to why there is such a discrepancy between Canada's standards and the international ones?
Mr. Murphy: I do not think that it was deliberately designed for Canada to arrive at a stage that we face today. One of the possible avenues at the time, in 1976 approximately, might have been to include an inflation protection rider, an inflationary factor, so the limit will go up by the CPI every other year, or something of that nature.
I am not sure if the existing legislation stipulates that the minister will review the limit every few years. I do not think it was intentional that we would arrive in 2005 with $75 million only, without any adjustment over the last few decades.
I am certainly encouraged by the preliminary discussions I have had with Natural Resources Canada. They were very preliminary discussions, but the department is recognizing the need to have that limit increased. I expect they may have the provision to have the limit looked at from time to time.
Senator Cochrane: What does ``time to time'' mean?
Mr. Murphy: Once every three or five years. Hindsight is 20/20. I did a calculation one day that if the CPI had been applied since 1976, we probably would be at $250 million or $260 million today. That is significantly higher than $75 million.
The Chairman: One of the reasons we are pursuing this matter is that we have a certain misgiving about the undertakings regarding the new proposals. The last time those undertakings were given to this committee was in 2000. It was imminent then and it has not happened yet.
Senator Tardif: I am new to this committee, so please forgive me if the answer to my question appears obvious. I do not understand when you say that we can find capacity. What does that mean? You are saying that you are up to $75 million, but then you have international pools and you can go up to $300-plus million. Do they lend you money?
Mr. Hammond: The way insurance and reinsurance works is that we have a certain appetite, based on the maximum dollars that my company can put forward as a member of this pool.
Beyond that, we can access through the British association other underwriters in the London market, and they may well be able to put up $5 million, $10 or $20 million. Bringing it all together, we can pool worldwide capacity.
It is not a question of them lending us any money or anything like that. It is the fact that NIAC comes and gets its domestic companies, who will put out certain dollar amounts, and then you will get other companies elsewhere in the world to put out dollar amounts and add them all up.
Senator Tardif: You do not do that on a regular basis, obviously, because you have never paid a claim.
Mr. Hammond: The point is that up to the $50 million, we have enough insurers in Canada who can do that. Beyond that, we have to go to insurers elsewhere in the world, and then NIAC will supply premiums to them for the risks they run. Obviously, they will pay losses, if there are any.
Senator Tardif: Is yours the only group or are there other groups in Canada that pay insurance for nuclear liability?
Mr. Murphy: Under the Nuclear Liability Act, we are the recognized facilitator or provider of coverage for nuclear liability. At the time the act was proclaimed in 1976, the British and American pools were also approved as providers of coverage.
Senator Tardif: But you are the only ones in Canada?
Mr. Murphy: That is correct.
Senator Tardif: There is no one else? You are the only organization that a contractor can go to to get their insurance.
Mr. Murphy: That is correct.
Senator Tardif: There are no other options?
Mr. Hammond: Because of the nature of the risk, individual companies cannot have enough capacity to put up. That is the nature of the pool, to get all the companies together to have a worthwhile proposition.
Senator Gustafson: It appears to me that the government carries the whole load. It is exactly like farm credit. The Bank of Montreal will loan you the money as long as the government guarantees it if you do not pay it. Really, your program is much the same.
You say that if you had a large mishap, you would go to Lloyd's of London and they will kick up some money, but only if the government guarantees it.
Mr. Hammond: The government is not guaranteeing my participation or the participation of any insurers in this pool. The fact that we put up $50 million or $650 million, including worldwide capacity, the government is not guaranteeing that. That is only payable by the members.
I think what we were talking about was a government coming in above that to provide additional capacity.
Senator Angus: Nor do they pay the premium on that primary coverage; the individual operators do.
Mr. Hammond: That is correct.
Senator Gustafson: Then how does Lloyd's of London come in, for instance, if you have not paid a premium to them?
Senator Angus: They do not.
Mr. Hammond: What we are talking about is that if we expand capacity up to $650 million, then the operator will pay more money, and we will pay that money to Lloyd's as a premium.
Senator Gustafson: Is that done in advance?
Mr. Hammond: Yes.
The Chairman: It is just like getting $2 million of coverage for PLPD on your car instead of $1 million; you will pay more.
You said you thought that at least some operators were happy at the prospect of increasing their coverage. I am going to ask Senator Tardif's question again. If that is attractive to them, can they not go out on their own and obtain coverage for that plant that is over and above the $75 million they are obliged to carry through you? Can they go to the market and seek another $10 million, or are they precluded from doing so by law or agreement among themselves?
Mr. Murphy: An operator can come to us at this point in time and say they do not think $75 million is enough, that they want $650 million, and we will go out and try to provide that capacity.
The Chairman: Can they only go through you?
Mr. Murphy: Yes.
The Chairman: Can they go into the market themselves to try to find that coverage?
Mr. Murphy: No.
The Chairman: They may not?
Mr. Murphy: They may not, based on the provisions contained in the Nuclear Liability Act, which direct them to the NIAC. I may have overstated their exuberance by saying they would be happy to pay.
The Chairman: Let us assume that someone who is operating a nuclear-powered electrical generating plant decides, or the government imposes upon them, a higher limit of public liability insurance. The premium might go up by approximately six times, as you said, give or take a nickel. When you had your discussions with them, to which you referred earlier, did they indicate to you whether it would be their intention in that event to pass that cost on directly to their customers?
Mr. Murphy: It is an area I would not feel appropriate to even ask that question, senator.
The Chairman: But it would be a reasonable assumption.
Mr. Murphy: It is an operating cost. You have had the opportunity to hear from the operators, and I do not know if that question was asked.
The Chairman: We all have to pay for insurance at the appropriate rate or suffer the consequences in the event that we do not.
Who is your client? Are you working for the generators, or are you working for the insurance companies?
Mr. Murphy: We are an intermediary.
The Chairman: I know, but it has to be one or the other.
Mr. Murphy: The insured is the operator. On the operators' behalf, we approach the various underwriters, the 20. Basically, we have two clients. It is a shared responsibility. There is no doubt in anyone's mind as to who the insured is and who is paying the premium, and that is the operator.
The Chairman: Where does NIAC's operating money come from?
Mr. Murphy: The premiums are passed on, and a small amount is withheld for management fees and operating costs.
The Chairman: You collect the premiums.
Mr. Murphy: Yes, and remit same to the companies, with a small amount taken off the top.
The Chairman: You are in the middle.
Senator Angus: They are a broker. Like any other insurance broker, the law has spelled out the responsibilities and duties of brokers.
Mr. Murphy: I should hasten to add that we are not a broker in the strict sense. We are an intermediary. We are not licensed. We have not fulfilled the broker obligations for licensing and the like. We are merely a facilitator, taking the requirement of the operator and matching it with the supply of capital from the market.
The Chairman: You did say earlier you were in some sense or to some degree allowed to be an underwriter.
Mr. Murphy: We assist in the underwriting of the risk, meaning that we gather facts and figures about the actual risk and present that to the underwriters in London or in the U.S — how many units at that particular location, one, four, six or whatever. That is underwriting information. The amount of output is another indicator that is necessary.
The Chairman: In the event of a claim, would the payment for the claim, assuming it was allowed, be made directly from the insurer to the operator, or would the money flow through NIAC?
Mr. Murphy: I hesitate, senator, because we have never had a claim.
The Chairman: I hope you never do.
Mr. Murphy: I believe the procedure would be to have it paid into NIAC. We do have a facility for emergency funds in the case of an incident. We are prepared to enter into the area, or wherever the emergency measures organization determines to be headquarters for the event. We are in a position to immediately start writing cheques for incidental experiences, et cetera.
The Chairman: Would you find the specific answer to that question? In the case of a given policy — the amount you have given to this guy or that guy, or that Lloyd's has — do those policies name the covered premises? Are they insuring you in order that you can pay out your operator clients, or are they insuring the clients severally?
Mr. Murphy: We are not named on any of the policy documents.
The Chairman: Are the operators?
Mr. Murphy: Yes, absolutely.
Mr. Hammond: Each operator would have a policy clearly indicating that they are insured, and that policy contains a list of the insurers, indicating our participation in that risk.
The Chairman: Is the policy issued by an insurer or by you?
Mr. Hammond: Perhaps I can go back and just say that, as the chain goes, the operator is the insured. A broker is involved, usually one of the big broker houses, who will broker the account to the Nuclear Insurance Association. The Nuclear Insurance Association, in essence, acts as my managing general underwriter. As an individual company, I cannot afford to go out and hire an underwriter specializing in the nuclear business.
The Chairman: You explained that clearly earlier.
If I am Operator A, or OPG, and I operate this plant, what is the name on the policy, and do I have one policy or several?
Mr. Hammond: You have one policy.
The Chairman: What is the name on it? Is it the broker, whoever that is?
Mr. Hammond: The name would be OPG, and there would be a list of insurance companies that actually run the risk.
Senator Christensen: Is there any limitation on what is covered in an insurance policy for a nuclear operation? I am thinking specifically of waste storage, because there is the big issue of trying to find proper waste storage and how it should be done. At the present time, it is stored on site, and it has a long shelf life. Are there limitations?
Mr. Hammond: If waste is stored by the operator on site, then it is covered by the liability policy. If the waste is taken off site, then it is not covered.
Senator Christensen: If another site was developed for waste storage for all of the different sites, that would be a whole different ball game.
Mr. Hammond: Absolutely. That is the situation in the U.S. They are developing a major waste storage facility in Nevada. If the government chose to go down that path, then we would try to figure out how to provide coverage.
Senator Christensen: If it was a shared waste facility, then either the government would have to cover it or there would be a shared premium for the ones using it.
Mr. Hammond: Absolutely.
The Chairman: As a matter of course, under the Nuclear Liability Act, would NIAC be the insurer for an off-site storage facility?
Mr. Murphy: It is possible that an off-site storage facility may become a designated nuclear site in the future. In such an event, we would be in a position to provide insurance coverage. That is not something that we drive, but rather the regulators would drive.
The Chairman: I want to finish up on the broader part of Senator Christensen's question. She referred to storage as an example, but her question was whether there are exemptions under the nuclear liability coverage that you provide to an operator. Are there exemptions, exceptions or exclusions?
Mr. Murphy: If I understand the question, there are exclusions in the policy. Again, they are numerous and quite detailed. I do not have the specific data with me, but yes, as is the case in every single policy that was ever created, shall we say, there is a list of insured perils and a list of excluded perils. There are provisions and conditions that will provide or make it clear that certain coverage is not available or not contemplated.
The Chairman: Would you undertake to provide to our clerk the list of exclusions?
Mr. Murphy: I will recommend we go a step further. I can provide the clerk with a copy of the Nuclear Liability Act, which is the all-encompassing legislation that will answer all of those questions.
The Chairman: We have a copy of the Nuclear Liability Act. I wonder if you would provide us with a list of the exemptions that would be shown in a policy which would be issued through you to one of your operator clients.
Mr. Murphy: I am struggling with the word ``exemptions.''
The Chairman: Exclusions.
Mr. Murphy: Fine, thank you.
The Chairman: Thank you very much, Mr. Hammond and Mr. Murphy. Your testimony has been most enlightening. We may have further questions, and I hope you will permit us to provide them in writing with the understanding that you will respond.
Mr. Murphy: It would be our pleasure, senator.
The Chairman: We will continue in camera to discuss future business of the committee.
The committee continued in camera.