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.

References

References
1.
European Nuclear Society
,
2015
,
Nuclear Power Plants, World-Wide
, https://www.euronuclear.org/info/encyclopedia/n/nuclear-power-plant-world-wide.htm (Accessed on Apr. 29, 2016).
2.
Ayyub
,
B. M.
,
2003
,
Risk Analysis in Engineering and Economics
,
Chapman and Hall/CRC Press
,
Boca Raton, FL
.
3.
Balachandran
,
G.
,
2010
, “
The Civil Nuclear Liability Bill
,”
Institute for Defence Studies and Analyses (IDSA), Brief
,
26
,
New Delhi, India
.
4.
American Nuclear Insurers
,
2013
,
Need for Foreign Nuclear Liability Insurance
,
Glastonbury, CT
.
5.
World Nuclear Association
,
2015
,
Liability for Nuclear Damage
.
6.
GAO (U.S. Government Accountability Office)
,
2004
, “
Nuclear Regulation: NRC’s Liability Insurance Requirements for Nuclear Power Plants Owned by Limited Liability Companies
,” .
7.
Friends of the Earth Europe
,
2007
, “
Nuclear Industry: Face Your Demons Towards Full Liability for Nuclear Power Plant Operators
,” https://www.foeeurope.org/sites/default/files/publications/FoEE_Nuclear_Face_your_demons_1007.pdf (Accessed on Apr. 29, 2016).
8.
Raju
,
S.
, and
Ramana
,
M.
,
2010
, “
The Other Side of Nuclear Liability
,”
Econ. Political Weekly
,
45
(
16
), p. 
49
54
.
9.
Ayyub
,
B. M.
, and
Parker
,
L.
,
2011
, “
Financing Nuclear Liability
,”
Science
,
334
(
6062
), p. 
1494
1494
. 0036-807510.1126/science.334.6062.1494-a
10.
Lund
,
S.
,
Daruvala
,
T.
,
Dobbs
,
R.
,
Härle
,
P.
,
Kwek
,
J.-H.
, and
Falcón
,
R.
,
2013
, “
Financial Globalization: Retreat or Reset?
,”
McKinsey Global Institute
.
11.
GAO (U.S. Government Accountability Office)
,
2002
, “
Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting Their Use
,” .
12.
McGhee
,
C.
,
Clarke
,
R.
,
Fugit
,
J.
, and
Hathaway
,
J.
,
2008
, “
The Catastrophe Bond Market at Year-End 2007: The Market Goes Mainstream
,”
Guy Carpenter & Company, LLC
,
New York
.
13.
Anger
,
C.
, and
Hum
,
C.
,
2014
, “
Catastrophe Bond Update: Fourth Quarter 2013
,”
Guy Carpenter & Company, LLC
,
New York
.
14.
Cummins
,
J. D.
,
2008
. “
Cat Bonds and Other Risk-Linked Securities: State of the Market and Recent Developments
,”
Risk Manage. Insurance Rev.
,
11
(
1
), pp. 
23
47
.10.1111/rmir.2008.11.issue-1
15.
Hagedorn
,
D.
,
Heigl
,
C.
,
Mueller
,
A.
, and
Seidler
,
G.
,
2009
, “Choice of Triggers,”
The Handbook of Insurance-Linked Securities
,
Wiley
,
UK
, pp. 
37
48
.
16.
Burnecki
,
K.
,
Kukla
,
G.
, and
Taylor
,
D.
,
2011
, “Pricing of Catastrophe Bonds,”
Statistical Tools for Finance and Insurance
,
Springer
,
Berlin
, pp. 
371
391
.
17.
Froot
,
K. A.
,
2001
, “
The Market for Catastrophe Risk: A Clinical Examination
,”
J. Financial Econ.
,
60
(
2
), pp. 
529
571
.
18.
Cox
,
S. H.
, and
Pedersen
,
H. W.
,
2000
, “
Catastrophe Risk Bonds
,”
North Am. Actuarial J.
,
4
(
4
), pp. 
56
82
.10.1080/10920277.2000.10595938
19.
Zimbidis
,
A. A.
,
Frangos
,
N. E.
, and
Pantelous
,
A. A.
,
2007
, “
Modeling Earthquake Risk Via Extreme Value Theory and Pricing the Respective Catastrophe Bonds
,”
ASTIN Bull.
,
37
(
1
), pp. 
163
184
.10.2143/AST.37.1.2020804
20.
Shao
,
J.
,
Pantelous
,
A.
, and
Papaioannou
,
A. D.
,
2015
, “
Catastrophe Risk Bonds With Applications to Earthquakes
,”
Eur. Actuarial J.
,
5
(
1
), pp. 
113
138
. 2190-973310.1007/s13385-015-0104-9
21.
Lee
,
J.-P.
, and
Yu
,
M.-T.
,
2002
, “
Pricing Default-Risky CAT Bonds With Moral Hazard and Basis Risk
,”
J. Risk Insurance
,
69
(
1
), pp. 
25
44
.10.1111/1539-6975.00003
22.
Shao
,
J.
,
Papaioannou
,
A.
, and
Pantelous
,
A.
,
2016
, “
Pricing and Simulating CAT Bonds in a Markov-Dependent Environment
,”
Preprint
.
23.
Ma
,
Z.-G.
, and
Ma
,
C.-Q.
,
2013
, “
Pricing Catastrophe Risk Bonds: A Mixed Approximation Method
,”
Insurance: Math. Econ.
,
52
(
2
), pp. 
243
254
.
24.
IAEA (International Atomic Energy Agency)
,
2013
,
Ines: The International Nuclear and Radiological Event Scale User’s Manual (2008 Edition)
,
Vienna, Austria
.
25.
Delbaen
,
F.
, and
Schachermayer
,
W.
,
1994
, “
A General Version of the Fundamental Theorem of Asset Pricing
,”
Math. Ann.
,
300
(
1
), pp. 
463
520
. 0025-583110.1007/BF01450498
26.
Nowak
,
P.
, and
Romaniuk
,
M.
,
2013
, “
Pricing and Simulations of Catastrophe Bonds
,”
Insurance: Math. Econ.
,
52
(
1
), pp. 
18
28
.
27.
Brigo
,
D.
, and
Mercurio
,
F.
,
2007
,
Interest Rate Models-Theory and Practice: With Smile, Inflation and Credit
,
2nd ed.
,
Springer
,
Berlin
.
28.
Cox
,
J. C.
,
Ingersoll
, Jr.,
J. E.
, and
Ross
,
S. A.
,
1985
, “
A Theory of the Term Structure of Interest Rates
,”
Econometrica
,
53
(
2
), pp. 
385
407
. 0098-169910.2307/1911242
29.
Griffith
, Jr.
S. C.
,
Fain
,
G. G.
,
Feinberg
,
K. R.
,
Foley
,
S. R.
,
Garrish
,
T. J.
,
Kearney
,
J. J.
,
Kennedy
,
W. F.
,
Murphy
,
A. W.
,
Rasmussen
,
N. C.
, and
Stahl
,
R. W.
,
1900
, “
Report to the Congress From the Presidential Commission on Catastrophic Nuclear Accidents
,”
University of Michigan Library
,
Ann Arbor, MI
.
You do not currently have access to this content.