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Is the World Becoming a Riskier Place?
Focus On Energy Insurance Markets
November 9, 2011
Robert P. Hartwig, Ph.D., CPCU, President & EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org
2
Presentation Outline
Review of Recent Events What in the World is Going On? A Review of Recent Trends in Uncertainty, Risk and Fear Energy and Insurance Market Issues
Economic Uncertainty and Volatility Global Overview & Outlook Advanced, Emerging and European Perspectives
The Unfortunate Nexus: Opportunity, Risk & Instability Growth Political Risk Arab Spring & Energy Markets
Catastrophe Loss Developments & Trends Global, Europe, US
Global Energy Market Overview Supply (Production), Demand (Consumption) and Rate Considerations The Post-Deepwater Horizon World
Summary Q&A
3
What in the World Is Going On?
Is the World Becoming a Riskier Place?
What Are the Implications for Insurance and Risk Management?
4
Uncertainty, Risk and Fear Abound
ECONOMIC & POLITICAL CONCERNS Global Economic Slowdown Echoes of the Financial Crisis European Sovereign Debt, Bank & Currency Crises Collapse of Major Financial Institutions US Debt and Budget Crisis, S&P Downgrade & Austerity Housing Crisis Persistently High Unemployment Inflation/Deflation Runaway Energy & Commodity Prices Political Upheaval in the Middle East Regulation ChinaNow the #2 Economy in the WorldCATASTROPHIC LOSS Japan, New Zealand, Turkey, Haiti, Chile Earthquakes Nuclear Fears US: Tornadoes, Flooding, Wildfires, Hurricanes, Winter Storms Manmade Disasters (e.g., Deepwater Horizon) Cyber Attacks Resurgent Terrorism Risk (e.g., Bin Laden, Gadhafi Killings)
Are “Black Swans”
everywhere or does it just seem that way?
5
What is Going On in the US and Global Financial Markets?
1. Need for a Binding, Comprehensive Solution to Europe’s Debt Problems Greek Tragedy: Debt AgreementReferendumNo ReferendumPM Resigns
Attention Quickly Turned to ItalyBudget Reforms Pass, Berlusconi Resigns
Financial “Firewall” around Italy, Spain, Ireland, Portugal may be too small
Difficulties in managing multinational institutions and economic policies
ECB and individual member EU countries not all on same page
Solution: Unified approach on banks, bailout fund; Monetary easing
OUTCOME: Eurozone countries will eventually stumble into a resolution
2. Economic Slowdown in Europe and Emerging Markets China, other economies less able to stimulate global economy than in 2008
OUTCOME: Mild Recession in Eurozone in 2012
3. Realization that US Economic Growth Will Remain Lackluster Q1 GDP just 0.4%; Q2 only 1.3%; Q3 still a subpar 2.5%; Acceleration unlikely
Job growth has been anemic for months and unemployment remains high at 9.0%
Markets remain extremely volatile and jittery; Housing/Debt hangover
OUTCOME: Tepid growth in the 2% - 2.5% range in 2012; Unemployment 8.5% - 9%
4. View that Washington is Dysfunctional and “Rudderless” Lack of coherent, consistent medium and long term plan to deal with basic structural issues in the US economy
(debt, taxes, employment, regulation, etc.)
No confidence that 2012 political cycle will resolve these problems
6
Déjà Vu? Lehman II? Is This 2008 All Over Again?
Why Today is Not 2008 All Over Again The Situation Today is Very, Very Different from 2008 Credit Markets in US Are Not Seizing; Some Contraction in Europe Bank Balance Sheets Are in Much Stronger Shape
Capital up, charge offs falling
We Will Not Experience the Mega-Collapses/Near Collapses Like in 2008 No repeat of Lehman, AIG, Washington Mutual, Wachovia…
MF Global is not a “Systemically Important Financial Institution”
Series of European bank failures likely: Dexia, Proton…; Big Bank Writedowns
Some Additional Regulatory Controls Are Now Place
What Would Be Helpful Now? Solution to European Bank/Sovereign Debt Problem (Part Way There?) Long-Term Fiscal and Monetary Policy Direction US Fed on Aug. 9 stated rates would remain low “at least through mid-2013” On Nov. 4, ECB’s Lower Its Key Rate to 1.25% (1st meeting w/ Mario Draghi) Both Europe and US Need to Address Excessive Spending and Entitlement Timebombs
7
Global Economic Growth Outlook: Volatility Remains
Growth is Much Greater in Developing World as Is Growth in Energy
Demand; These Areas Are Riskier to Operate In
8
World Economic Outlook: 2009-2012F
Sources: IMF, World Economic Outlook, Sept. 2011; Insurance Information Institute.
5.0
%
3.0
%
2.8
%
1.7
% 3.9
%
4.5
%
1.9
%
1.8
%
1.1
% 2.3
%
-0.5%
-3.4%
2.7%
-2.6%-4.1%
-6.3%
7.3
%
4.3
%
1.6
% 6.4
%
1.5
%
1.6
%
-0.5
%
6.5
%-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
World Output AdvancedEconomies
EmergingEconomies
United States Euro Area Japan
2009 2010 2011F 2012F
Outlook uncertain: The world economy continues to recover from the global economics, but at a weakening pace and at different speeds in
different parts of the world, according to the IMF. A clear set of “winners” has emerged with direct implications for all industries and
their insurers.
IMF says growth in emerging and developing economies will outpace advanced ones in 2011/12.
March 11 Japan
quake hurt 2011 growth
9
Real GDP Growth Forecasts: US and Major European Economies: 2011 - 2012
Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.
1.7%
0.9%
1.6%
2.9%
1.6%
0.6%
0.6%
1.9% 2.
3%
1.8%
1.1%
0.4%
0.9%
0.8%
-0.3
%
0.1%
1.1% 1.2%
-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%
US UK EuroArea
Germany France Italy Spain Switz. Belgium
2011F 2012F
Growth projections for 2011 and 2012 have been revised downward as austerity measures take effect and concerns related to sovereign debt
worsen
10
Real GDP Growth Forecasts for Advanced Economies: 2011 - 2012
1.7%
1.0%
3.0%
1.6%
-0.6
%
2.2%
2.0%
1.4%
1.4%
0.9%
2.4%
2.2%
-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%
UnitedStates
UnitedKingdom
Germany France Japan Canada
2011F 2012F
Growth projections for 2011 and 2012 have been revised downward as austerity measures take effect and concerns related to sovereign debt
worsen
Sources: The Economist, November 5, 2011; Insurance Information Institute.
11
Real GDP Growth Forecasts for 2011:US and Major European Economies
Sources: The Economist, November 5, 2011; Insurance Information Institute.
1.7%
0.9% 1.
6% 3.0%
2.3%
1.6% 2.
9%
-7.5
%
0.6% 1.
7%
0.6% 2.
0%
1.4%
1.4%
0.7%
4.0% 4.3%
4.2%
1.9%
-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%
US UK
Euro
Are
a
Aust
ria
Belg
ium
Fran
ce
Ger
man
y
Gre
ece
Italy
Neth
erla
nds
Spai
n
Czec
h Re
p.
Denm
ark
Hung
ary
Norw
ay
Pola
nd
Russ
ia
Swed
en
Switz
erla
nd
Growth projections for 2011 have been revised downward as austerity measures take effect and concerns related to sovereign debt worsen
12
9.0%
7.5%
4.0%
3.6% 3.8%
8.4%
7.9%
4.0%
3.9%
3.3%
0%
4%
8%
12%
China India Russia Brazil Mexico
2011F 2012F
Growth in emerging and developing economies will greatly outpace advanced country growth in 2011/12. This will accelerate the growth of insurance
exposures in emerging markets relative to the U.S., W. Europe and Japan.
Real GDP Growth Forecasts for Key Developing Economies: 2011 - 2012
Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.
Growth in China and India remain high, though China is “tapping on the breaks”
to slow inflation. These markets are promising but foreign firms must
contend with many barriers to entry.
13
3.8%
4.6%
5.3%
1.8%
3.8% 4.
2% 4.5%
3.5%
0%
4%
8%
South Korea Taiwan Hong Kong Australia
2011F 2012F
Growth in industrialized Asian economies will greatly outpace much of the rest of the world in 2011/12. This will accelerate the growth of energy demand and insurance exposures in emerging markets relative to the U.S., W. Europe
and Japan.
Real GDP Growth Forecasts for Other Key Trading Economies: 2011 - 2012
Sources: Blue Chip Economic Indicators (10/2011 issue); Insurance Information Institute.
Asia/Pacific trading nations should show strong growth in 2011/12
compared to Europe and the US
(4.0)
(2.0)
0.0
2.0
4.0
6.0
8.0
10.0
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Advanced economies Emerging and developing economies World
Source: International Monetary Fund, World Economic Outlook Update, Sept. 2011; Ins. Info. Institute.
Emerging economies (led by China) are expected to grow by 6.4% in 2011 and
6.1% in 2012.
GDP Growth: Advanced & Emerging Economies vs. World, 1970-2012F
Advanced economies are expected to grow at a sluggish pace of 1.6% in
both 2011 and 1.9% in 2012.
World output is forecast to grow by 4.0% in 2011 and 4.0% in 2011,
following growth of 3.0% in 2010 and a 0.6% drop in 2009.
GDP Growth (%)
15
Relative Shares of Global Output,Advanced vs. Developing Economies, 2009
Developing Economies
47.1%
Advanced Economies
52.9%
Source: EDC Economics, “The Moment of Truth: Global Export Forecast Fall 2010, at http://www.edc.ca/english/docs/gef_e.pdf
The gap is closing quickly. China became the world’s second largest economy in 2010 and before long
the developing world’s share of GDP will exceed that of advanced
economies.
16
Current Real GDP Growth vs. Pre-Crisis Average (2000-2007 vs. 2011F-2012F*)
*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.
Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.
Latin and South American markets are
in general growing more strongly than prior to the crisis
The US, Europe and Eurasia have seen
significant slowdowns
17
Current Real GDP Growth vs. Pre-Crisis Average (2000-2007 vs. 2011F-2012F*)
*Percentage point difference between compound annual rates of change 2000-2007 vs. forecasts for 2011-2012.
Source: IMF, World Economic Outlook, September 2011; Insurance Information Institute.
Growth in much of Europe today is about 2 pts.
Lower than pre-crisis
18
The Unfortunate Nexus: Opportunity, Risk & Instability
Most of the Global Economy’s Future Gains Will be Fraught with Much
Greater Risk and Uncertainty than in the Past
19
Global Real (Inflation Adjusted) NonlifePremium Growth: 1980-2010
Source: Swiss Re, sigma, No. 2/2010.
Nonlife premium growth in emerging markets has
exceeded that of industrialized countries in
27 of the past 31 years, including the entirety of the
global financial crisis..
Real nonlife premium growth is very erratic in part to inflation volatility in emerging markets as
well as a lack of consistent cyclicality
Average: 1980-2010
Industrialized Countries: 3.8%
Emerging Markets: 9.2%
Overall Total: 4.2%
20
Nonlife Real Premium Growth Ratesby Region: 2000-2009 and 2010
Source: Swiss Re, sigma, No. 2/2011.
Every emerging
market region except Central
and Eastern Europe
experienced growth during the financial
crisis and into 2010
Many emerging market economies continued to grow during the global
financial crisis and continued to benefit from foreign direct investment
21
Distribution of Nonlife Premium: Industrialized vs. Emerging Markets, 2009
Sources: NAIC; Insurance Information Institute research.
Although premium growth throughout the industrialized world was negative in 2009, its share of global nonlife premiums remained very high at nearly 86%--accounting for nearly $1.5 trillion in premiums.
The financial crisis and sluggish recovery in the major insurance markets will accelerate the expansion of the emerging market sector
Premium Growth Facts
14.3%85.7%
Industrialized Economies
$1, 485.8
Emerging Markets$248.8
2009, $Billions
Developing markets now account for 47% of global
GDP but just 14% of nonlife premiums
22
Nonlife Real Premium Growth in 2010
Source: Swiss Re, sigma, No. 2/2011.
Latin and South American markets performed
relatively well during and after the global financial crisis in terms of growth
There was also growth in the Middle East, East and South Asia as well as Australia and New
Zealand
23
Political Risk in 2010: Greatest Business Opportunities Are Often in Risky Nations
Source: Maplecroft
The fastest growing markets are generally
also among the politically riskiest
Heightened risk has insurance implications
24
The “Arab Spring” Has Exacerbated Uncertainty in an Already Volatile Part of the World
Source: Wikipedia as of Nov. 7, 2011; Insurance Information Institute research.
Energy-rich nations have been among the most unstable in 2011
Longer-run, significant
investment and insurance
opportunities exist throughout
the region
Government overthrown Sustained civil disorder and governmental changes Protests and governmental changes Major protests Minor protests Protests outside the Arab world
Arab Springالربيع العربي
Catastrophe Loss Developments and Trends
25
2011 and 2010 Are Rewriting Catastrophe Loss and
Insurance History
26
Global Catastrophe Loss Summary: First Half 2011
2011 Is Already (as of June 30) the Highest Loss Year on Record Globally
Extraordinary accumulation of severe natural catastrophe: Earthquakes, tsunami, floods and tornadoes are the primary causes of loss
$260 Billion in Economic Losses Globally
New record for the first six months, exceeding the previous record of $220B in 2005
Economy is more resilient than most pundits presume
$55 Billion in Insured Losses Globally
More than double the first half 2010 amount
Over 4 times the 10-year average
$27 Billion in Economic Losses in the US
Represents a 129% increase over the $11.8 billion amount through the first half of 2010
$17.3 Billion in Insured Losses in the US Arising from 100 CAT Events
Represents a 162% increase over the $6.6 billion amount through the first half of 2010
27Source: MR NatCatSERVICE
Natural Loss Events,January – September 2011
World Map
28Source: MR NatCatSERVICE
Worldwide Natural Disasters 2011 Significant Natural Disasters (January – September only)
Insured losses 2011 (January – June only): US$ 60bnInsured losses 2011 (January – June only): US$ 60bn
Worldwide Natural Disasters 2011% Distribution of Insured Losses Per Continent (January – June only)
29
21%21%
49%49%
<1%
29%29% <1%
<1%
Source: MR NatCatSERVICE
Insured losses 1980 - 2011 (January – June only): US$ 389bn Insured losses 1980 - 2011 (January – June only): US$ 389bn
30Source: MR NatCatSERVICE © 2011 Munich Re
58%58%
2%
21%21%
<1%
12%12%
6%
Worldwide Natural Disasters, 1980-2011% Distribution of Insured Losses Per Continent (January – June only)
31
Recent Major Non-US Catastrophe Losses
(Insured Losses, $US Billions)
Sources: Insurance Council of Australia, Munich Re, AIR Worldwide; Insurance Information Institute research.
$35.0
$10.0$9.0$8.0$5.0
$2.0$0.5$0
$5
$10
$15
$20
$25
$30
$35
$40
Cyclone Yasi(Australia) Feb
2011
AustraliaFloods (Dec -
Feb 2011)
New ZealandQuake (Sep
2010)
ChileEarthquake(Feb 2010)
Thai Flooding(Nov 2011)
New ZealandQuake (Feb
2011)
JapanEarthquake(Mar 2011)
Insured Losses from Recent Major Catastrophe Events Approach $70 Billion, an Estimated $53 Billion of that from
Earthquakes
The March 2011 earthquake in Japan will become among the most expensive in world history in terms of insured losses (current
leader is the 1994 Northridge earthquake with $22.5B in insured losses in 2010 dollars)
32Source: MR NatCatSERVICE
Deadliest/Costliest Earthquakes:1900 – June 2011
33
Top 17 Most Costly World Insurance Losses, 1970-2011*
(Insured Losses, 2010 Dollars, $ Billions)
*Through November 7, 2011. 2011 disaster figures are estimates; Figures include federally insured flood losses, where applicable.Sources: Swiss Re sigma 1/2011; AIR Worldwide, RMS, Eqecat; Insurance Information Institute.
$10.0 $11.3 $14.0 $14.9 $16.3$20.5 $20.8 $23.1 $24.9
$35.0
$72.3
$9.3$9.0$9.0$8.0$8.0$7.8
$0
$10
$20
$30
$40
$50
$60
$70
$80
WinterStorm Daria
(1991)
ChileQuake(2010)
Hugo (1989)
Thai Floods(2011)
TyphoonMirielle(1991)
Charley(2004)
NewZealandQuake(2011)
Rita (2005)
Wilma(2005)
Ivan (2004)
SpringTornadoes/
Storms(2011)
Ike (2008)
Northridge(1994)
WTC TerrorAttack(2001)
Andrew(1992)
JapanQuake,
Tsunami(2011)*
Katrina(2005)
Taken as a single event, the Spring 2011 tornado and
thunderstorm season would likely become the 7th
costliest event in global insurance history
5 of the top 15 most expensive
catastrophes in world history have occurred in the past 21 months
100
200
300
400
500
600
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Worldwide Natural Disasters,1980 – 2011*
Number of Events
*2011 figure is through June 30.Source: MR NatCatSERVICE 34
Meteorological events(Storm)
Hydrological events(Flood, mass movement)
Climatological events(Extreme temperature, drought, forest fire)
Geophysical events(Earthquake, tsunami, volcanic eruption)
There were 355 events through the first 6
months of 2011
US
$bn
Worldwide Natural Disasters 1980–2011,Overall and Insured Losses*
35
Overall losses (in 2011 values) Insured losses (in 2011 values)
*2011 figure is through June 30.Source: MR NatCatSERVICE © 2011 Munich Re
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
First Half 2011
Overall Losses: $265 Bill
Insured Losses: $60 Bill
36
US CATASTROPHE INSURED LOSS UPDATE
First Half 2011 CAT Losses Already Exceed All of 2010 and Could Become One of the Most
Expensive Years on Record
37
$8
.3
$7
.4
$2
.6 $1
0.1
$8
.3
$4
.6
$2
6.5
$5
.9 $1
2.9 $
27
.5
$6
1.9
$9
.2
$6
.7
$2
7.1
$1
0.6
$1
3.6 $2
5.0
$1
00
.0
$7
.5
$2
.7
$4
.7
$2
2.9
$5
.5 $1
6.9
$0
$20
$40
$60
$80
$100
$120
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11*20??
US Insured Catastrophe Losses
*Estimate through Nov. 1, 2011.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Sources: Property Claims Service/ISO; Insurance Information Institute.
2011 Will Likely Become the 5th or 6th Most Expensive Year for Insured Catastrophe Losses in the US, After Adjusting for Inflation
$100 Billion CAT Year is Coming Eventually
Record Tornado Losses Caused
2011 CAT Losses to Surge
($ Billions)
2000s: A Decade of Disaster
2000s: $193B (up 117%)
1990s: $89B
Nu
mb
er
Geophysical (earthquake, tsunami, volcanic activity)
Climatological (temperature extremes, drought, wildfire)
Meteorological (storm)
Hydrological (flood, mass movement)
Natural Disasters in the United States, 1980 – 2011*Number of Events (Annual Totals 1980 – 2010 and First Half 2011)
*Through June 30.Source: MR NatCatSERVICE 38
50
100
150
200
250
300
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
There were 98 natural disaster events in the first
half of 2011
37
8
51
2
Number of Federal Disaster Declarations, 1953-2011*
13 1
7 18
16
16
7 71
21
22
22
0 25
25
11
11
19
29
17
17
48
46
46
38
30
22 2
54
22
31
52
42
13
42
7 28
23
11
31
38
45
32 3
63
27
54
46
55
04
54
5 49
56
69
48 5
26
37
55
98
1 86
43
0
10
20
30
40
50
60
70
80
90
100
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
*
*Through September 30, 2011.Source: Federal Emergency Management Administration: http://www.fema.gov/news/disaster_totals_annual.fema ; Insurance Information Institute.
The Number of Federal Disaster Declarations Is Rising and Set a New Record in 2011
The number of federal disaster declarations set a new record in 2011, with 86 declarations through Sept.
30. It is no wonder that FEMA is broke!
There have been 2,036 federal disaster
declarations since 1953. The average
number of declarations per year is 34 from
1953-2010, though that few haven’t been
recorded since 1995.
40
Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1990–2011:H11
0.2%
2.4%
3.4%4.9%
6.6%
8.0%
31.8%
42.7%
1.Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2009 dollars.2.Excludes snow.3.Does not include NFIP flood losses4.Includes wildland fires5.Includes civil disorders, water damage, utility disruptions and non-property losses such as those covered by workers compensation.Source: ISO’s Property Claim Services Unit.
Hurricanes & Tropical Storms, $160.5
Fires (4), $9.0
Tornadoes (2), $119.5
Winter Storms, $30.0
Terrorism, $24.9
Geological Events, $18.5
Wind/Hail/Flood (3), $12.7
Other (5), $0.6
Wind losses are by far cause the most catastrophe losses,
even if hurricanes/TS are excluded.
Tornado share of CAT losses is
rising
41
GLOBAL REINSURANCE MARKET CONDITIONS
Record Global Catastrophes Activity is
Pressuring Pricing
Source: Holborn; RAA.
* 2011 events are as of March 31 and are preliminary and may change as loss estimates are refined further.
Significant Market Losses, 1985-2011*
Source: Holborn, RAA. *2011 events as of March 31 are preliminary and may change as loss estimates are refined further.
Significant Market Losses by Event, 1985-2011*
Reinsurers are bearing a very high
share of recent catastrophe losses
Losses are putting pressure on property cat reinsurance prices in affected
regions. The impact for US property catastrophe pricing is uncertain.
Source: Guy Carpenter, GC Capital Ideas.com, September 26, 2011.
Global Property Catastrophe Rate on Line Index, 1990-2011 YTD (6/1/11)
A modest increase in global property catastrophe reinsurance pricing was
evident in June 1 renewals in the wake of record global catastrophe
losses. Larger increase could occur for the Jan.1, 2012 renewals
45
Change in US Commercial Rate Renewals, by Account Size: 1999:Q4 to 2011:Q3
Source: Council of Insurance Agents and Brokers; Insurance Information Institute.
Percentage Change (%)
Peak = 2001:Q4 +28.5%
Pricing Turned Negative in Early
2004 and Has Been Negative
Ever Since
Pricing turned positive (+0.9%) in Q3:2011, the first increase in
nearly 7 years (Q4:2003)
KRW Effect: No Lasting Impact
Trough = 2007:Q3 -13.6%
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11*
US Policyholder Surplus:1975–2011*
* As of 6/30/11.Source: A.M. Best, ISO, Insurance Information Institute.
“Surplus” is a measure of underwriting capacity. It is
analogous to “Owners Equity” or “Net Worth” in
non-insurance organizations
($ Billions)
The Premium-to-Surplus Ratio Stood at $0.78:$1 as of6/30/11, A Near Record Low (at Least in Recent History)**
Surplus as of 6/30/11 was a near-record $559.1 down 1% from the record $564.7B as of 3/31/11, but up 27.9% ($122B) from the crisis trough of $437.1B
at 3/31/09. Prior peak was $521.8 as of 9/30/07. Surplus as of 6/30/11 was 7.1% above 2007 peak.
47
Much Uncertainty Exists in the World, But Energy Demand Grows Under All Scenarios
Energy is One of the Few Major Markets/Industries With Clear
Growth Long-Term Trends
34
7.7
47
2.4
50
8.3
55
1.5 59
5.7
63
7.3
67
8.3
46
2.1
0
100
200
300
400
500
600
700
800
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
World Primary Energy Consumption, 1990-2030P
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
Between 2006 and 2030, energy consumption in projected to increase
annually by 1.5% worldwide but only 0.5% in the US
Quadrillion BTUs
Global energy consumption is
expected to increase by 33.4% between 2010 and 2030 but by only 12% in
the US
Avg. Annual Change in Total Energy Consumption by Country/Region:2006-2030P
Average Annual Change in Consumption (Quadrillion BTUs)3.2%
2.6% 2.5%
1.5%
0.9%0.5% 0.5%
1.1%1.2%1.4%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
Ch
ina
Bra
zil
Ind
ia
Can
ada
S.
Ko
rea
Mex
ico
Au
st/N
Z
Ru
ssia US
Eu
rop
e(O
EC
D)
Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute
US/Europe have the slowest growth rates for energy
consumption through 2030, growing at less than 1/6 the rate
in China and 1/5 that of India
49
50
Global Oil Demand and Production,by Region
Source: IMF, World Economic Outlook, Sept. 2011; Insurance Information Institute.
Oil Demand in Advanced Economies is Weak but Production Gains Continue to Satisfy Demand in Emerging Countries
Percentage Change (%)-3
.5%
2.9
%
3.3
%
-0.3
%
-4.0
%
2.2
%
-5.8
%
1.9
%
1.5
%
5.1
%
2.2
%
2.0
%
-0.6
%
3.5
%
4.8
%
0.8
%
-0.2
%
4.4
%
-0.4
%
0.7
%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
AdvancedEconomies
EmergingEconomies
OPEC Non-OPEC
2007 2008 2009 2010 2011P
51
US Natural Gas Production and Non-Hydro Renewable Electricity Generation, 1990-2035P
Source: US Energy Information Administration, Annual Energy Outlook 2011; Insurance Information Institute.
Shale gas production is expected to grow rapidly in the US
Wind is expected to account for the majority of renewable
electricity generation
11.3
14.6
18.0
20.6
23.2
26.0
28.9
31.8
12.6
0
5
10
15
20
25
30
35
1990 1995 2000 2006 2010 2015 2020 2025 2030
World Net Effective Electric Power Generation, 1990-2030P
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
Global electric power generation was dampened about 3% by the
global financial crisis, but will still grow at 2.9% per year through 2030 compared to 1.9% for total energy
consumption
Trillions of Kilowatt Hours
Avg. Annual Change in Electricity Generating Capacity by Country/Region:2006-2030P
Average Annual Change in Generating Capacity (Gigawatts)4.6%
3.3%3.0%
2.1%1.5% 1.4% 1.3% 1.3%
0.9%
1.9%1.9%2.1%
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%
Ch
ina
Ind
ia
Bra
zil
Afr
ica
Mid
dle
Eas
t
Mex
ico
S.
Ko
rea
Eu
rop
e (O
EC
D)
Can
ada
Ru
ssia
Au
st/N
Z
US
Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute
Electrical generation capacity in Europe is expected to grow
faster than in the US. Post-Japan quake, it may grow
faster still.
53
54
Massive Investments in Global Energy
Infrastructure Are Needed
Upgrading an Antiquated Energy Infrastructure is Also Critical for
Future Energy Security
Biofuels, $0.3 , 1%
Oil, $10.1 , 27%
Natural Gas, $9.5 ,
25%
Power, $16.9 , 44%
Coal, $1.1 , 3%
Projected energy infrastructure investment
through 2035 total $38 trillion; Implies substantial
incurrence of risk.
Cumulative Projected Investment in Global Energy Infrastructure, 2011-2035 ($ Trill.)
Source: International Energy Agency, World Energy Outlook 2011.
Electricity Supply Infrastructure:Despite Crisis, Huge Investments Needed Along With Insurance: 2001-2030 (Est.)
$ Billions
$1,351
$1,876
$809
$377
$744
$258
$609$783$799
$1,913
$0
$500
$1,000
$1,500
$2,000
$2,500
Eu
rop
e
No
rth
Am
eric
a
Pac
ific
Ru
ssia
Ch
ina
E.
Asi
a
S.
Asi
a
Lat
inA
mer
ica
Mid
dle
Eas
t
Afr
ica
Source: International Atomic Energy Agency, World Outlook for Electricity Investment.
Investments in electricity supply infrastructure
globally are expected to total $9.841 trillion
between 2001 and 2030
European investment could total $1.351
trillion
56
57
Oil Demand Will Rise, Oil Prices Will Rise Still Faster
Long-Run Demand and Price Dynamics Remain Strong for Oil and
Associated Insurance Markets
58
Commodity Price Changesin 2010-2011*
100
150
200
250
300
350
400
1/1
/20
10
1/1
5/2
01
01
/29
/20
10
2/1
2/2
01
02
/26
/20
10
3/1
2/2
01
03
/26
/20
10
4/9
/20
10
4/2
3/2
01
05
/7/2
01
05
/21
/20
10
6/4
/20
10
6/1
8/2
01
07
/2/2
01
07
/16
/20
10
7/3
0/2
01
08
/13
/20
10
8/2
7/2
01
09
/10
/20
10
9/2
4/2
01
01
0/8
/20
10
10
/22
/20
10
11
/5/2
01
01
1/1
9/2
01
01
2/3
/20
10
12
/17
/20
10
12
/31
/20
10
1/1
4/2
01
11
/28
/20
11
2/1
1/2
01
12
/25
/20
11
3/1
1/2
01
13
/25
/20
11
4/8
/20
11
4/2
2/2
01
15
/6/2
01
15
/20
/20
11
6/3
/20
11
Metals Food Raw Materials Crude Oil Gold
*data are through June14, 2011Source: International Monetary Fund World Economic Outlook June 2011 update at http://www.imf.org/external/pubs/ft/weo/2010/update/01/data/figure_2.csv
Index (Jan 3, 2006 = 100)
Raw materials prices doubled over the course of 2010. Some other commodity
prices dropped during the year but ended 20-30% higher. The upward
trend has continued in to 2011.
High Demand is Driving Up Prices And Fueling Trade
Global Oil Consumption and Price, 2008 – 2035F
Millions of Barrels per Day Nominal Price/BBL
*Source: US Energy Information Administration; Insurance Information Institute
85
.5
83
.7 86
.0 87
.4 88
.9 90
.3
90
.4
91
.1 92
.5
92
.9
93
.5
94
.3
95
.1 96
.1
97
.1
98
.2 99
.3
10
0.5
10
1.8
10
3.2
10
4.5
10
6.1
10
7.6
10
9.1
11
0.8
92
.0
91
.5
89
.6
$108
.10
$112
.36
$114
.21
$115
.96
$117
.54
$118
.99
$120
.25
$121
.34
$122
.30
$123
.09
$123
.71
$124
.20
$124
.53
$124
.68
$124
.94
$110
.30
$105
.71
$103
.15
$100
.50
$97.
62
$94.
58
$91.
38
$83.
21
$61.
66
$100
.51
$85.
73
$88.
03
$78.
03
80
85
90
95
100
105
110
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
20
26
20
27
20
28
20
29
20
30
20
31
20
32
20
33
20
34
20
35
0
20
40
60
80
100
120
140
Total Consumption Nominal Price (Light, Low Sulfur Crude)
Oil Will Become Relatively More Expensive Over Time, With Price Increases Outstripping Income Growth in Many Parts of the World
The nominal price of oil is expected to rise by 2.8% per year
on average through 2035
Global oil consumption is expected to rise by 1.1% per
year on average through 2035
60
Efforts to Reduce Global Carbon Emissions Have Weakened Since 2008
Global Financial Crisis, Japan Nuclear Experience, Politics, Economics Have
All Taken Their Toll
Avg. Annual Change in Carbon Dioxide Emissions by Country/Region:2006-2030P
Millions of Metric Tons2.8%
2.5%2.1%
1.9%
0.8%0.6% 0.6%
0.3%0.1%
1.1%1.2%1.5%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Ch
ina
Bra
zil
Ind
ia
Mid
dle
Eas
t
Afr
ica
S.
Ko
rea
Mex
ico
Can
ada
Au
st/N
Z
Ru
ssia US
Eu
rop
e (O
EC
D)
Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute
CO2 emissions in Europe are expected to just 0.1% per year through 2030, among the slowest in the world and
about 1/30th the rate in China
61
21
,48
8
29
,02
8
30
,96
7
33
,11
1
35
,42
8
37
,87
9
40
,38
5
28
,29
6
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
Global Carbon Dioxide Emissions, 1990-2030P
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
Between 2006 and 2030, CO2 emissions are projected to
increase by 1.4% worldwide, just 0.1% in Europe and 0.3%
annually in the US
Millions of Metric Tons
Global CO2 emissions are expected to increase by 30.4% between 2010
and 2030
1,9
09
2,6
60
2,7
61
3,0
45 3,3
85
3,6
46
3,8
44
2,6
39
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1990 2005 2006 2010P 2015P 2020P 2025P 2030P
World Nuclear Energy Consumption, 1990-2030P
Source: Energy Information Administration, 2009 International Energy Outlook, Insurance Information Institute.
Between 2006 and 2030, nuclear energy consumption in projected to increase by 1.5% annually worldwide
Billion Kilowatthours
Global nuclear energy consumption is expected to increase by 39.2% between 2010 and 2030 but could be lower if Europe reduces use
of nuclear power
Avg. Annual Change in Nuclear Energy Consumption by Country/Region: 2006-2030P
Billions of Kilowatthours9.
9%
8.9%
3.5%
3.2%
1.2%
1.1%
0.8%
0.6%
0.6%
-0.1
%
1.5%2.
0%2.3%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Ind
ia
Ch
ina
Ru
ssia
Afr
ica
S. K
ore
a
Bra
zil
Can
ada
Jap
an
Mex
ico
Can
ada
Ru
ssia US
Eu
rop
e*
*OECD Countries.Source: Energy Information Administration, 2009 International Energy Outlook, Ins. Info. Institute
Europe will see small a decrease in nuclear energy consumption through 2030
64
65
As Energy Demand Rises, Exploration and
Distribution Risks Abound
Deepwater Horizon (Macondo) Will Not Be the Last Major Energy Market
Catastrophe
66
After Deepwater Horizon…
“Deepwater energy exploration and production, particularly at the frontiers of experience, involves risks for which neither industry nor government has been adequately prepared, but for which they can and must be prepared in the future.”National Commission on the BP Deepwater Horizon Oil Spill
and Offshore Drilling, January 2011.
10 Most Expensive Operators Expense (OEE) Losses in History
Year Type Location, Country OEE Indexed US$
2010 Rig (Deepwater) Gulf of Mexico, USA $2,000,000,000
2005 Platform Gulf of Mexico, USA 636,047,269
1989 Well North Sea, Norway 396,419,527
2008 Platform Gulf of Mexico, USA 384,080,640
2005 Platform Gulf of Mexico, USA 341,560,173
1984 Well Nova Scotia, Canada 320,593,818
1988 Platform North Sea, UK 308,109,489
1987 Platform Gulf of Mexico, USA 264,476,529
1975 Well Dubai, UAE 246,250,219
2004 Rig Mediterranean, Egypt 230,104,683
Source: Willis Energy Loss Database, April 1, 2011; Insurance Information Institute.
Deepwater Is By Far the Most Expensive OEE Loss in Global History, Even After Adjusting for Inflation
Largest International Oil Well Blowouts by Volume
Date Well Location Bbl Spilled
April 20 2010-July 2010
Deepwater Horizon Gulf of Mexico, USA est. 4,900,000 thru July 15*
June 1979-April 1980
Ixtoc I Bahia del Campeche, Mexico 3,300,000
October 1986 Abkatun 91 Bahia del Campeche, Mexico 247,000
April 1977 Ekofisk Bravo North Sea, Norway 202,381
January 1980 Funiwa 5 Forcados, Nigeria 200,000
October 1980 Hasbah 6 Gulf, Saudi Arabia 105,000
December 1971 Iran Marine International Gulf, Iran 100,000
January 1969 Alpha Well 21 Platform A Pacific, CA, USA 100,000
March 1970 Main Pass Block 41 Platform C
Gulf of Mexico 65,000
October 1987 Yum II/Zapoteca Bahia del Campeche, Mexico 58,643
December 1970 South Timbalier B-26 Gulf of Mexico, USA 53,095
*Based on official estimate by U.S. scientific teams of 53,000 barrels per day leaking from BP well immediately preceding it being capped on July 15. Includes offset for capture of approximately 800,000 barrels of oil prior to capping of well.
Source: American Petroleum Institute (API), 09/18/2009; http://www.api.org/ehs/water/spills/upload/356-Final.pdf and updates from the Insurance Information Institute.
69
Global Offshore Blowouts, 1984 - 2009: Frequency
Source: Willis Energy Loss Database, February 9, 2011; Insurance Information Institute.
Frequency in recent years is generally below
the 25-yr. average
70
Global Offshore Blowouts, 1984 - 2009: Severity
Source: Willis Energy Loss Database, February 9, 2011; Insurance Information Institute.
Severity was rising even before
Deepwater Horizon
71
Annual Average US Offshore Spillage per Unit Barrel, 1969-2007
Source: American Petroleum Institute Analysis of U.S. Oil Spillage, 2009, from Willis Energy Market Review, April 2011 ; Insurance Information Institute.
Spillage rates pre-Deepwater were down substantially. Likely
also true in most other parts of the
world as well.
72
Upstream Insurer Capacities, 2000-2011 (Excluding Gulf of Mexico Windstorm)
Capacity has nearly doubled since 2006
Source: Willis Energy Market Review, April 2011; Insurance Information Institute.
73
Energy Insurer Capacities & Average Rating Levels, 1993-2011 (Excl. GoM Wind)
*Willis Marketplace Realities, October 2011
Source: Willis Energy Market Review, April 2011; Insurance Information Institute.
Capacity and rates were up in early 2011, flattening
headed into 2012*
74
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