Marsh India

CLND AND C-ROSSA BRIEF OVERVIEW29 JULY 2015

Gokulkrishna RajeevalochananSummer intern

Marsh India

Mumbai,India

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TITLE OF CONTENTS• Introduction –Nuclear power and risks posed by nuclear reactors

• Extent of loses in a nuclear accident and loss reduction techniques

• Current scenario of risks in India and legislative measures

• Impact of CLND on risk bearers

• Role of Marsh

• Recommendations

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Introduction –Nuclear power and associated risks

• Nuclear risk :- Probability of loss from radioactive material emitted from a nuclear installation

• High severity low frequency loss

• First nuclear reactor – 2 BWR`s erected at Tarapur 1963

• Total of 21 nuclear reactors in India with 5 under construction

• Nuclear power – 4780 MW which 1.9% of the total electricity produce

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Risk posed by nuclear reactors

• Three types of nuclear reactor:- – PHWR– BWR– VVER-1000

• Flaws in PHWR:- – Presence of a Zr metal alloy inside the containment structure– After years of use, reactivity control mechanisms may not be very reliable to prevent

abnormal spikes.

• Flaws in BWR:-– GE Mark I, which is the BWR variant has high rate of failure– Irradiated fuel disposal is not efficient in BWR

• Flaws in VVER-1000:-– Presence of holes in the containment vessel inherent to design– Small pressure vessel diameter– High positive void coefficient of the reactor which makes the reactor over heat in case of

an incident.

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EXTENT OF LOSSES IN A NUCLEAR ACCIDENT

• Difficult to quantify nuclear losses

• Chernobyl : Losses - $15 billion. Contaminated area:- 694,200 Hectors.

• Fukushima accident:- Losses- $250 billion Area contaminated:- almost 3% of area of Japan, $80 billion immediately for its decontamination by Govt

• Even in case of a partial meltdown with no effects, the real estate market would significantly impacted.

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LOSS REDUCTION TECHNIQUES DEPLOYED

• Broadly classifying, the risk can be managed by:-– Risk Retention– Abstaining from risk– Controlling the risk– Transferring the risk

• Options of a nuclear operator : Insurance and Bank guarantee

• Traditional insurance arrangement not preferred for nuclear risks

• 27 nuclear pools including Indian nuclear pool

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CURRENT SCENARIO IN INDIA FOR NUCLEAR RISKS AND RELATED LEGISLATION

• The nuclear risk formed by India has the composition as provided below– PSU insurers + GIC re – Rs. 800 crores– Private insurers – Rs. 200 crores– NRI( Nuclear risk insurers) – Rs. 500 crores

• The types of policies offered by the pool currently are Nuclear operator liability policy and Nuclear suppliers contingency policy.

• The nuclear related regulations in India are governed by CLND act 2010. that holds suppliers liable for in case of a nuclear catastrophe.

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CURRENT SCENARIO IN INDIA FOR NUCLEAR RISKS AND RELATED LEGISLATION

• A unique aspect of CLND 2010 : Section 17 of the act

• Maximum liability of the operator and Govt under CLND 2010.

• Retaining risk from operator`s point

• Operator also liable for damages under other acts such as EPA and Law of Tort

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IMPACT OF CLND ON RISK BEARERS

• The probability of a nuclear accident is in the order of 3.2 *10-4

• The risk bearers have no idea of the exposure and the actual risks. Currently, the nuclear risks are not undertaken after inspection as it would be against the security protocols of Indian Govt

• Furthermore, the claim as per CLND is a no fault liability which means that the claim would be provided without any proof of fault by operator.

• It is obvious here that risk bearers are dealing with a risk that is of very low frequency and very high severity.

• Even though the Indian nuclear pool has not reinsured with other pools, it is very likely that Indian nuclear pool would reinsure globally and risk would get spread globally.

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SWOT ANALYSIS – MARSH INDIA

Strength * Involvement right from the inception of the project and hence complete knowledge of the risks* High level contacts with NRI* Two layered structure with a separate entity to coordinate with foreign insurer.

Weakness *Not much data on the portfolio and the claims pattern.*Nuclear legislative laws still in infancy stage.*Analysing nuclear risks involves a nuclear specialist and Marsh would have to depend on its overseas counterpart for analysing the risks.

Opportunities  *Providing extra cover to nuclear operator other than from CLND.*Providing cover for nuclear supply chain delays/ project delays.*Providing product liability cover for suppliers

Threats *Limited scope in the current risk.Chance of competition from other insurance brokers.*Chance of nuclear operator and suppliers forming a mutual nuclear insurance company

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RECOMMMENDATIONS AND CONCLUSION

• With the data we have, we know that there would be considerable market for nuclear insurance in near future

• It would be highly advantageous for Marsh to know the maximum probabilistic risk of Indian reactors nuclear as risk pool could be globally reinsured.

• As suppliers can be held liable, they would definitely opt for insurance in risks such as product risk, negligence risk etc. Marsh could look into ways of assisting suppliers.

• Nuclear supply chain is an unexplored market till now. This is a high potential market and Marsh would be interested in a feasibility analysis for exploring the market.

• To conclude, I would state that with entry as an intermediator in Indian Nuclear Insurer Pool, Marsh has unlocked a wide range of opportunities.

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TITLE OF CONTENTS• Introduction

• Overview of solvency I regulations

• Challenges in solvency I

• Introduction to solvency II and C-ROSS

• Impact of C-ROSS on Industry

• Conclusion

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Introduction

• Solvency : the degree to which current assets of an insurer exceeds his liabilities

• High implications on society if insurer is not able to pay in claims

• IRDA: formed for regulating insurers and ensuring good financial health of the company

• Insurers required to have a maintain minimum solvency level as per IRDA regulations

• Global switch from EU solvency I regulations to solvency II regulations with Chinese insurers being the latest

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Overview of Solvency I regulation

• Solvency ratio (solvency I) is given by – Total ASM (Available solvency margin)

Total RSM (Required solvency margin)

• ASM is calculated as the sum of excess of shareholders funds and the excess of policy holders fund.

• RSM calculations is based on multiplying the Gross premium/Gross claims by the factor table provided by IRDA

• The factor values of each class of business would be separate for each class of business

• Total RSM of the insurer would be the total of RSM`s of all class of business handled by the insurer.

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Challenges in Solvency I regulation

Some of the major shortfalls of solvency I regulations are provided below

• Solvency calculation based on previous year data

• Composition of the portfolio not taken into account

• Inadequate consideration to reinsurance

• No differential consideration of capital investments

• Theoretical risk appetite of the company is not taken into account

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Introduction to Solvency II and C-ROSS

• C-ROSS : A Chinese variant of EU solvency II regulation

The major differences between EU and C-ROSS are

• EU II solvency regulator is decentralized, but for C-ROSS, the regulator CIRC is a centralized authority.

• C-ROSS was developed without any political compromises and hence has struck more to the original version than EU II solvency regulation.

• The quantitative requirement of C-ROSS is more closer to Basel II than EU solvency II

• The degree of discretion of the regulator is higher in C-ROSS than in EU –II solvency regulation.

C-ROSS is basically composed on 3 structural requirements or pillar

• Quantitative capital requirements

• Qualitative supervisory requirements

• Market discipline mechanism

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C-ROSS

• Qualitative capital requirement – links minimum capital requirements to insurance risk/ credit risk and market risk.

• According to quantitative capital requirement, the capital requirements varies with the market risk/ credit risk.

• Qualitative supervisory requirement – Qualitative supervisory risk address risks that are different to quantify like

• Operational risk

• Strategic risk

• Reputational risk

• Liquidity risk

Currently two supervisory controls placed by CIRC are

• IRR (integrated risk rating )

• SARMRA (Solvency aligned risk management requirement and assessment

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IMPACT OF C-ROSS

• Market discipline mechanism: CIRC overseeing technique

C-ROSS regulation would bring in significant amount of changes in Chinese insurers like

• Necessity for up gradation of risk and capital management practices

• More diversified insurers likely to benefit from C-ROSS

• Type -2 insurers would need to consider strategic alternatives or raise fresh capital

• There would be change in the product mix and entry of smaller insurer into new portfolios

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PREPARING FOR C-ROSS

• Investing in more sophisticated information management systems

• Revamping governance risk or capital consideration in management decision

• Upgrading pricing strategies

• Focus on reinsurance

• Increasing focus on operational risk and distributional channel

• Upgrading organizational skills

Limitation of the necessary database is a hindrance in implementing C-ROSS in India.

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CONCLUSION

• The advantages of Marsh to get benefitted in ROSS implementation

• Global presence

• Deep experience in financial services industry

• Experience in Life, p and c asset management

• High level technical knowledge

• Adequate resource to help small and medium insurers with their compliance

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PRESSURIZED HEAVY WATER REACTOR

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BOLING WATER REACTOR

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PRESSURIZED WATER REACTOR (VVER-1000)

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PIE-CHART OF ENERGYCONTRIBUTION FROM SOURCES IN INDIA

148478.39

4780

40730.09

31692.14

CoalNuclearHydroOthers

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LINE CHART SHOWING THE IMPORTANCE OF NUCLEAR ENERGY

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TOP COUNTRIES POWERED BY NUCLEAR ENERGY

France

Slovak

ia

Hunga

ry

Ukraine

Belgium

Sweden

Switzerl

and

Sloven

ia

Czeh r

epub

lic

Finlan

d

Bulgari

a

Armen

ia

South

Korea

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

Top 13 Nuclear powered countries

Series1

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RSM Calculation according to solvency I regulations

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ASM Calculation according to solvency I regulations

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RE-INSURER RATING FOR AN INDIAN GENERAL INSURER

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C-ROSS REPRESENTATIONAL CHART

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C-ROSS QUANTITATIVE CAPITAL REQUIREMENT