Research Papers

Toward Resilience to Nuclear Accidents: Financing Nuclear Liabilities via Catastrophe Risk Bonds

[+] Author and Article Information
Bilal M. Ayyub

Center for Technology and Systems Management,
University of Maryland,
College Park, MD 20742
e-mail: ba@umd.edu

Athanasios A. Pantelous

Department of Mathematical Sciences and
Institute for Risk and Uncertainty,
University of Liverpool,
Liverpool L69 7ZL, UK
e-mail: A.Pantelous@liverpool.ac.uk

Jia Shao

Department of Mathematical Sciences and
Institute for Risk and Uncertainty,
University of Liverpool,
Liverpool L69 7ZL, UK
e-mail: J.Shao1@liverpool.ac.uk

Manuscript received May 7, 2015; final manuscript received April 29, 2016; published online August 19, 2016. Assoc. Editor: James Lambert.

ASME J. Risk Uncertainty Part B 2(4), 041005 (Aug 19, 2016) (9 pages) Paper No: RISK-15-1055; doi: 10.1115/1.4033518 History: Received May 07, 2015; Accepted April 29, 2016

In light of the 2011 Fukushima disaster, recent discussion has focused on finding the best nuclear storage options, maximizing the oversight power of global institutions, and strengthening safety measures. In addition to these, the development of dependable liability coverage that can be tapped in an emergency is also needed and should be considered thoughtfully. To succeed, financing is essential using special-purpose instruments from the global bond market, which is as big as US$175 trillion. Thus, in this paper, for the first time, a two-coverage-type trigger nuclear catastrophe (N-CAT) risk bond for potentially supplementing the covering of U.S. commercial nuclear power plants (NPPs) beyond the coverage per the Price Anderson Act as amended, and potentially other plants are proposed and designed worldwide. The N-CAT peril is categorized by three risk layers: incident, accident, and major accident. The pricing formula is derived by using a semi-Markovian dependence structure in continuous time. A numerical application illustrates the main findings of the paper.

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Grahic Jump Location
Fig. 1

NPP units worldwide, in operation and under construction, as of Mar. 10, 2015 [1]: (a) number of plant units and (b) electric net output

Grahic Jump Location
Fig. 2

Time to a catastrophic nuclear accident as a function of the number of NPP units worldwide

Grahic Jump Location
Fig. 3

Global stock of debt and equity outstanding, US$ trillion, end of period, constant 2011 exchange rates [10]

Grahic Jump Location
Fig. 4

Nuclear power risks

Grahic Jump Location
Fig. 5

Possible states changes of the system

Grahic Jump Location
Fig. 6

Value of N-CAT bonds (z-coordinate axes) under the log-normal, the NHPP, and stochastic interest-rate assumptions. Here, time to maturity (T) decreases by the left axes and the threshold level (D) increases by the right axes. With the fixed threshold level of US$100 million, bond value decreases from US$781.16 to US$455.31 for the maturity time from a half year to 2 years. This is a quicker rate for the threshold level US$1,600 million, with a bond value decreasing from US$948.42 to US$855.32. For a fixed time to maturity, the N-CAT bond value increases when the threshold level increases (from US$100 million to US$1,600 million), and with a quicker rate for longer maturity time (form US$781.16 to US$948.42 for T=0.5 and US$455.31 to US$855.32 for T=2).




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