Third party legal liability insurance of operators of especially hazardous facilities market: catastrophic consequences

Reevaluation and reloading: the accident at the Sayano-Shushensk hydro power plant revealed the necessity for complete modernization of the market of third party legal liability insurance of operators of especially hazardous facilities market (TPLLIOEHF). Like the terrorist act on the 11th of September 2001 in the USA led to full review of the principles of assessment of terrorist risks by both insurers and policyholders, the accident at the Sayano-Shushensk hydro power plant will provoke reevaluation of risks of hydro power plants similar to the at the Sayano-Shushensk one in terms of technical characteristics. Insurance companies will change the approach to assessment of such risks, will increase the value of maximum possible damage. Reinsurers will also stiffen the underwriting and pricing policy. Owners of hazardous enterprises, having assessed the scale of probable consequences, will try on their part to increase the insurance coverage in TPLLIOEHF. The state shall in its turn adopt a new law on TPLLIOEHF, permit to relate premiums associated with TPLLIOEHF to production cost.

Compulsory underinsurance: the level of underinsurance in the market of TPLLIOEHF reached at the time of the accident 95%. Reasons - absence of legislative, economic and psychological stimulus for development of demand. Minimum insurance amounts (maximum 7 million rubles according to the law "On industrial safety of especially hazardous facilities"), the limited number of insurance events and prohibition to relate insurance premiums to production cost render the existing system of TPLLIOEHF extremely inefficient. The market volume amounted in 2008 to 2 billion rubles, in the first half of 2009 - 1.6 billion rubles (increase by -0.1% compared to the first half of 2008).

The new law on TPLLIOEHF resolves many above listed problems: increases the amounts of insurance sums (the interval from 10 million to 6 billion rubles) establishes clearer criteria of calculation thereof, expands the definition of the term "accident" and the list of hazardous facilities. The main minus of this draft law is the fact that it has not yet been adopted. Consideration of the new law on TPLLIOEHF in the second reading was postponed repeatedly since December of 2005.

Continuous delays are explained by strong industrial lobbies: short term of the planning horizon and underestimation of the subjective assessment of the probability and consequences of accidents by owners of especially hazardous facilities make them opponents of the new law. One of the arguments stated by them is the possibility of unjustified overestimation of tariff rates while referring to the low level of losses from TPLLIOEHF. In the opinion of Expert RA, these concerns are unjustified: overestimation of tariff rates is only possible in case of a monopoly or a cartel agreement among all participants of the market, a high level of competition and insufficient control of the underwriting policy of insurance companies will, just the reverse, facilitate development of damping in this segment of the insurance market. In the long-term perspective loss from TPLLIOEHF will exceed the average market indicators.

Not to repeat the way of the Compulsory Motor Third Party Liability Insurance: efficiency of operation of the new law on TPLLIOEHF will directly depend on the chosen principles of calculation of tariff rates and existence of requirements to quality of insurance coverage. There are 3 approaches to determination of insurance tariff rates in compulsory types of insurance:

1. Legislative determination of tariff rates. Pluses: exclusion of situations of unjustified overestimation of insurance tariff rates or damping. Minuses: the problem of establishment of adequate tariff rates, complexity of pricing for all specific cases, the problem of efficient responding to change in the situation.
2. Market determination of tariff rates. Pluses: taking into account various specific situations, flexibility in case of any change in the situation. Minuses: creation of preconditions for damping and overestimation of tariff rates.
3. Compromise variant: the basic part to be determined legally plus the market premium. Under the conditions of the hard competition average market tariff rates will be set at the level of the legally determined basic part. As a result the compromise variant will be equal to the first variant - legislative determination of tariff rates.

In the opinion of Expert RA, if an insurance pool is formed combining insurers of liability of enterprises-sources of higher hazard, then tariff rates shall be determined within the framework of the insurance pool. Otherwise - only legally since the probability of damping in such case will be extremely high. At that, special attention shall be paid to requirements to reliability of insurance companies incorporated into the insurance pool or simply dealing with compulsory third party legal liability insurance of operators of especially hazardous facilities market. One of the essential criteria for admission of an insurer in the market of TPLLIOEHF shall be a high reliability rating of such insurer.