Specialty Insurance

A Nuclear Dilemma

Funding shortfalls emerge in the decommissioning of unprofitable nuclear facilities.
By: | December 14, 2016 • 8 min read

By the end of 2016, Southern California Edison will select from among three teams of contractors vying for the $4.4 billion job of decommissioning its San Onofre 2 and 3 nuclear power reactors in San Clemente, Calif.

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Even before the lucrative contract is awarded, the jockeying for it marks a significant shift in risk management and planning for the entire nuclear industry: the emergence of a robust, competitive market to manage and execute the physical job as well as provide financing, insurance and risk management services.

The primary drivers of nuclear power plant decommissioning changed through the years, said Dan McGarvey, managing director of the U.S. power and utility practice at Marsh.

As of July, the NRC listed 19 reactors undergoing decommissioning. That number is expected to grow.

“The classic decommissioning was because of technologies that either ran their course or failed to live up to their potential. Others were driven by the untimely requirement to replace major components or effect expensive repairs,” he said.

In the future, the main driving forces are likely to be the dictates of energy markets, McGarvey said.

“Because of the unprecedented low cost of natural gas, some nuclear stations have been determined to be not economically viable.”

Whether utilities will be able to scrape together the funds to decommission plants is a question mark.

According to Arun Mani, a partner at Oliver Wyman, nuclear plants are facing a tough economic environment in large part because of low natural gas prices, which have pushed down wholesale power prices.

Rob Battenfield, senior vice president of downstream energy, JLT Specialty USA

Rob Battenfield, senior vice president of downstream energy, JLT Specialty USA

With an average operating cost of $35/MWh, nuclear plants are battling to stay afloat. In an environment of falling gas and power prices, nuclear power is often out of the money.

“When a nuclear plant closes,” said Mani, “especially if it is retired prematurely, it adds to a growing gap, the difference between funded and unfunded liabilities for decommissioning. Those estimated costs industrywide have risen by about 60 percent since 2008 and now stand at $88 billion, of which 31 percent, or $27 billion, is unfunded.”

“The underfunded or even unfunded costs of decommissioning worldwide is a huge issue,” said Rob Battenfield, senior vice president of downstream energy at JLT Specialty USA.

From the moment a utility is granted a license to operate by the Nuclear Regulatory Commission (NRC), it is required to accumulate a trust fund against the ultimate cost of decommissioning. Historically, those costs have run about $480 million for one reactor, and about $800 million for a two-unit complex.

There are many variables in the matrix of operating or closing a nuclear plant, of which the mandated and actual size of the trust fund are only two. And in essence the trust fund is something between a running start and a show of good faith.

“If a utility is supposed to have $300 million in the trust fund, and it has that or even a little more, but the actual cost of closing the facility is going to be $400 million, then the utility is on the hook for that full $400 million,” Battenfield said.

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The market fluctuations that vex individuals planning for retirement do the same to trust funds, only on a larger scale.

“If a utility was planning to retire a unit in 2010, but its trust fund lost 40 percent of its value in the economic crisis of 2009, that would seem to favor safe storage for a few decades and give the fund time to recover,” Battenfield said.

According to Oliver Wyman’s Mani, “as the number of plants being decommissioned increases and the costs balloon, there are increasing fears around a potential shortfall in planned nuclear decommissioning funds.”

As of July, the NRC listed 19 reactors undergoing decommissioning. That number is expected to grow.

“In the past couple of years, about 6,000 MW of nuclear capacity has been shuttered,” Mani said.

“In all, analysts expect as much as 11 percent of the nation’s nuclear fleet will face premature retirement over the next several years.”

Decommissioning is not usually a core utility competence, as many have not performed the operation before. As a result, there’s a competitive market among major global contractors with specialization in the process.

Several utilities have transferred or plan to transfer shuttered nuclear plants — facilities, liabilities, licenses and trust funds — to those contractors. One example that is nearing the end of the process is Zion 2, in Illinois.

For all the regulatory complexity, the insurance program is relatively simple.

“There is now a large contingent of experienced people who can decommission plants,” said Battenfield.

While some may pause at the idea of a company or consortium, however large and experienced, taking on a reactor decommissioning as a for-profit business, Battenfield is sanguine.

“Through the whole project the NRC does not go away. Their oversight is arduous and detailed,” he said.

Covering it All

For all the regulatory complexity, the insurance program is relatively simple. The property coverage through the Nuclear Energy Insurance Ltd. (NEIL) mutual is available, and coverage from American Nuclear Insurance (ANI) is sufficient to meet mandatory limits for third-party liability on any license holder.

Outside of those, any commercial coverage is handled the same as if a factory or refinery were to be sold.

“They start fresh with workers’ comp and other commercial lines,” said Battenfield.

“The new owners will have their own carriers that they probably would like to keep. The incumbent carriers from the utility will either try to get into the new program, or take that opportunity to get out.”

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Once the decision is made to take a facility out of service, the operator must make the business decision either for prompt or protracted decommissioning. Immediate decontamination and demolition is known as “decon,” and takes several years.

The longer option involves securing and idling the site and is called safe storage or “safestor.” The facility can be kept in safestor for up to 60 years.

“The first risk management issue is which option to select,” McGarvey said.

“Prompt decommissioning involves a significant outlay of capital, but if the trust fund is sufficient it may make the most sense just to be done with it.”

If there are multiple reactors with at least one still in operation, the logical option is most likely safe storage, McGarvey said, because continuing operations offer economy of scale due to the fixed costs involved in operating an active site. But even if there are no other reactors, there are elements of risk mitigation in pursuing the safe storage option.

“Radiation begins to decay immediately after shut down, and over what could be 20 or more years of safe storage,” said McGarvey.

The ultimate cost of decommissioning could be markedly reduced because the radiation risk of fuel and components is lessened. Also, technology may improve over time and reduce future costs.

Conversely, the potential downside of waiting many years to decommission are the ongoing costs of plant upkeep, and the chance that a future regulatory climate may require levels of cleanup beyond those required today.

McGarvey summarized the step-down of coverage.

Dan McGarvey, managing director of the U.S. power and utility practice, Marsh

Dan McGarvey, managing director of the U.S. power and utility practice, Marsh

The chances of a radiation release significantly decrease once the reactor is no longer operating. Most utilities take their property coverage from limits as high as $2.75 billion down to the legal minimum of $1.06 billion. When the fuel stored in the spent-fuel pools cools to below a stipulated threshold, the utility is given greater latitude in selecting an appropriate first-party coverage limit.

At that point first-party coverage presents challenges in view of the need to preserve selected items of vital equipment in a facility that is otherwise slated for demolition.

“NEIL is very flexible and works well with utilities as they proceed through the decommissioning process,” said McGarvey.

Once the reactor is shut down, every asset on the site is divided into four categories for property coverage: Essential equipment is kept at replacement cost, less important components may be at actual cash value or agreed salvage value, and some buildings may be left without insurance save for decontamination coverage.

On the liability side, the first layer of coverage for an operating reactor is commercial insurance for a mandated $375 million. The next $13 billion is a mandatory retrospective pooling mechanism called the Price-Anderson Secondary Financial Protection Program that can assess up to $126 million per reactor, per incident, from all U.S. operators.

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“Once the plant is permanently shut, a utility will want to get out of that club, but must petition regulators to do so,” McGarvey said.

Once the spent fuel is cooled below a certain level, the operator can further petition to reduce commercial liability limits from $375 million to $100 million.

The nuclear liability policy provided by ANI is a modified occurrence policy, which has a 10-year discovery period. As such, it’s recommended that the policy not be allowed to lapse for many years even when the reactor is fully decommissioned.

Overall, operators have to be very careful about stepping down their nuclear liability coverage.

“You start with $13 billion,” McGarvey said, “which not only responds for radiological site releases, but also follows every truckload of low-level radiological waste shipped from the site. Eventually over time you get down to just $100 million of commercial insurance as the operator’s sole protection against nuclear liability claims.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]