Irda sounds out insurers on nuclear accident cover

|MUMBAI: A year after private nuclear plants became a possibility in India following the Indo-US nuclear deal, the insurance regulator is deliberating with companies to cover liabilities arising out of nuclear accidents, which is essential for such plants.

“Our discussions on insurance covers for nuclear risks are at a preliminary stage,” Irda chairman J Hari Narayan told ET. “We need to examine global practices of covering such a liability before taking a final view,” he said.

The nuclear treaty of last year allows India to carry out nuclear trade, have options for nuclear power and access to sensitive technology which are also used for nuclear weapons. But the absence of rules for insurance in the sector prevented progress in setting up new plants.

Currently, nuclear risks are not covered by any policy, as insurers do not have the wherewithal to estimate liabilities. All property insurance covers exclude losses due to nuclear reaction, nuclear radiation or radioactive contamination.

In most countries, operators of nuclear plants buy insurance cover as they are liable to pay compensation for any damage. Normally, the liability is limited by both international conventions and national legislation. The state has the responsibility to accept any liability more than insured. The absence of such covers here may make it difficult to fund relief, if an accident occurs.

The US, for instance, is not bound by any international nuclear liability convention. The liability from a nuclear accident is addressed by the Price Anderson Act of 1956, which provides $10 billion in cover without cost to the government. It covers power reactors, research reactors and all other nuclear facilities. More than $200 million has been paid by US insurance pools in claims and costs of litigation since the Price Anderson Act came into effect, all of it by the insurance pools.

The beginning of discussions itself may not lead to a set of rules soon, since the negotiations with global re-insurers are going to be hard. “There is now scope for private sector participation in nuclear power generation. We have been working with international re-insurers to form a pool to cover nuclear risks. But that will take some time to fructify,” said Yogesh Lohiya, chairman, GIC.

Incidentally, a partial cover for nuclear power plants was introduced by Oriental Insurance earlier under the chairmanship of Mr Lohiya. “At that time, providing a cover was difficult, as re-insurers wanted inspection of the site, which was not possible. Despite this, we managed to arrange cover for the cold zone of nuclear plants,” he said. A nuclear power plant has a “hot zone”, which is the critical area where the nuclear reactions take place and a “cold zone” where steam generated turbines are operated.

A pool mechanism, as in the case of terror insurance, may be a suitable one, said M Ramadoss, CMD at Oriental Insurance. Under a pool the premium collected by various insurers under terror cover are kept in a separate account. For any claim beyond a prescribed amount, the company dips into the pool resources to pay for claims. But that may not be enough, since claims from nuclear accidents could be huge and it may need government support.

Special Deposit Schemes: Pension puzzle persists

A week from now, India’s retirement funds will be again sizing up investment options which will yield them decent returns needed to meet the pay-out obligations of their members who are due to retire.

Every year, in the first week of January, retirement or provident funds receive interest payments aggregating Rs 10,000 crore or more on their investment in Special Deposit Schemes or SDS as it is popularly known. The scheme, which was first floated by the government in 1975, was later extended several times and until further notice a few years ago. The SDS has a corpus of over Rs 1,15,000 crore, which has not grown after the goverrnment stopped reinvestment of interest in the scheme. Instead, pension and provident funds have to park the interest which accrues every year in other instruments such as government or state government securities or bonds of state owned firms.

Over five years ago, the government had set in motion an exercise to restructure its liabilities on this count. There were a couple of options—one being to pay off the investors or the retirement funds by offering cash. The second one being to wind down the scheme by issuing marketable government securities in lieu or against the SDS. The first option was obviously ruled out given the cash strapped status of the government while the other proposal to issue G-Secs met with political resistance as it would have meant lower returns for subscribers.

The Employees Provident Fund Organisation, which says it is running the largest social security scheme in the world has a large chunk of its corpus in SDS (Rs 55,000 crore in the scheme) while several other retirement funds have over 20-30 % in this scheme. The challenge for these funds now is to plan ahead for meeting their liabilities considering that in 2012 many of them will see a lot of their members retiring. Clearly, engaging in asset -liability matching would be difficult with a substantial part of the coprus locked away in an open-ended scheme, which the uncharitable term as a ponzi scheme.

Not just that. Over the last few years, most funds had the comfort of high yielding securities issued by state-owned companies on their portfolio. Some of these investments are due to be redeemed in the next year or two and that is when maximising returns would prove to be tough. Fund managers who handle money for these retirement vehicles say that even if the SDS were to be wound up—it would still help as the redemption amount can be invested in a range of short term instruments which could then be switched to longer maturity instruments when rates move up.

In a high interest rate regime, it is tempting for fiscal policy mangers to maintain status quo on this as the SDS offers money to finance the deficit at a relatively lower rate. But as it moves towards fiscal consolidation, the government can surely think of working out a road map for restructuring these liabilities.Clarity on this is what counts for those dealing with long term funds.