Energy Infrastructure and
Vulnerabilities
Insurance Market Perspectives
U.S. Department of Energy
Quadrennial Energy Review Public Meeting
Washington, DC
April 11, 2014
Download at www.iii.org/presentations
Robert P. Hartwig, Ph.D., CPCU, President & Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5520  Cell: 917.453.1885  bobh@iii.org  www.iii.org
Energy Is a Very Large and
Very Challenging Business for
Insurers Worldwide
Energy is One of the Few Major
Markets/Industries With Clear
Long-Term Growth Trends
2
Energy Insurance Market Summary
 Energy is Among the Insurance Industry’s Largest
Industry Sectors
 Insurers Have Extensive Experience Offering
Comprehensive Solutions Across the Entire Spectrum of
Energy Industry Property and Liability Exposures
 Extraction (on/offshore)
 Refining and Storage
 Transportation (marine, rail, truck)
 Generation (Electricity)
 Renewables
 Workers Compensation
 Management Liability (D&O)
3
Energy Insurance: Market Summary
(cont’d)
 Multi-Billion Dollar Limits Are Available in Most Segments
 Property and liability exposures
 Risks are rewarded for superior experience
 Results Can Be Volatile
 Insurers Work Closely With Client Risk Managers
 Price of Coverage is Both Event Driven and Cyclical
 Market is Truly Global
 Substantial share of underwriting capacity originates abroad
 History of Working Closely to Reduce Loss, Enhance
Resilience
 Major losses stimulate innovative risk management
 Price (premium/rate) is a powerful signal about risk; Motivates
4
World Primary Energy Consumption,
1990-2040P
Quadrillion BTUs
900
800
700
600
Growth in worldwide
energy consumption will
create more risk and
vulnerabilities (natural and
manmade); Innovations in
risk management and
insurance are needed.
729.2
629.8
523.9
500
400
819.6
406.0
354.8
Between 2010 and 2040,
energy consumption in
projected to increase by
56.4% worldwide
300
200
100
0
1990
2000
2010
2020P
2030P
Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.
2040P
Cumulative Projected Investment in
Global Energy Infrastructure, 2011-2035 ($ Trill.)
Projected energy
infrastructure investment
through 2035 total $38
trillion; Implies substantial
incurrence of risk.
Natural
Gas, $9.5 ,
25%
Coal, $1.1 ,
3%
Biofuels,
$0.3 , 1%
Power,
$16.9 , 44%
Oil, $10.1 ,
27%
Source: International Energy Agency, World Energy Outlook 2011.
US Electric Power Generation by Fuel Source,
2010-2035F (Billions of Kilowatt Hours)
Coal
Petroleum
Natural Gas
Nuclear
Renewable
Other
4,118
4,279
4,427
594
630
914
887
5,000
4,500
4,000
3,500
3,000
3,806
390
807
3,796
3,937
504
544
579
887
917
1,074
874
983
903
882
26
27
27
25
26
1,531
1,604
1,710
1,757
1,803
2015
2020
2025
2030
2035
830
2,500
2,000
776
32
1,500
1,000
1,799
500
0
2010
Demand for Electricity Is Expected to Grow at a 0.6% Annual Rate Through 2035.
Renewables and Natural Gas Will Account for an Increasing Share of Fuel Source
Source: US Energy Information Administration, Annual Energy Outlook 2012, Appendix A7.
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The Past Few Years Have Not Been
Kind to Insurers or Utilities
Hurricane Irene: Aug. 27-29, 2011
Insured Losses: $4.3 Billion
Customers w/o Power: 5 Million
“Snowtober” Blizzard:
Oct. 29, 2011
Insured Losses: ~$1
Billion
Customers w/o Power:
2.7 Million
Derecho:
June 29, 2012
Insured Losses:
~$1+ Billion
Customers w/o
Power: 3.7 Million
Source: Insurance Information Institute research.
Superstorm Sandy: Oct. 29-30, 2012
Insured Losses: $18.8 Billion
Customers w/o Power: 8.1 Million
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U.S. Insured Catastrophe Losses
$73.4
($ Billions, $ 2012)
$33.6
$35.0
$12.8
$7.5
$10.5
$29.2
$33.7
$16.3
$7.6
$6.1
$11.6
$14.3
$3.8
$11.0
$12.6
$8.8
$10
$8.0
$20
$4.8
$30
$14.0
$40
$26.4
$37.8
$50
$34.7
$60
$14.4
$70
2012 was the third
most expensive year
ever for insured CAT
losses
$11.5
$80
$0
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*
2012 Was the 3rd Highest Year on Record for Insured
Losses in U.S. History on an Inflation-Adj. Basis. 2011
Losses Were the 6th Highest. YTD 2013 Running Well
Below 2011 and 2012 YTD Totals.
Record tornado
losses caused
2011 CAT losses
to surge
*Through 12/31/13.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01 ($25.9B 2011 dollars). Includes only business and personal property
claims, business interruption and auto claims. Non-prop/BI losses = $12.2B ($15.6B in 2011 dollars.)
Sources: Property Claims Service/ISO; Insurance Information Institute.
9
Inflation Adjusted U.S. Catastrophe
Losses by Cause of Loss, 1993–20121
Wind/Hail/Flood (3), $14.9
Fires (4), $6.5
Other (5), $0.2
1.7%
Geological Events, $18.4
4.7% 3.8%0.1%
Terrorism, $24.8
6.3%
Winter Storms, $27.8
7.1%
Tornado share of
CAT losses is
rising
Tornadoes (2), $140.9
Insured cat losses
from 1993-2012
totaled $391.7B, an
average of $19.6B
per year or $1.6B
per month
40.4%
Hurricanes & Tropical Storms,
$158.2
36.0%
Wind losses are by
far cause the most
catastrophe losses,
even if hurricanes/TS
are excluded.
1. Catastrophes are defined as events causing direct insured losses to property of $25 million or more in 2012 dollars.
2. Excludes snow.
3. Does not include NFIP flood losses
4. Includes wildland fires
5. 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.
10
Top 16 Most Costly Disasters
in U.S. History
(Insured Losses, 2012 Dollars, $ Billions)
Hurricane Sandy
became the 5th
costliest event in US
insurance history
$60
$50
$48.7
$40
$30
Includes
Tuscaloosa, AL,
tornado
Includes
Joplin, MO,
tornado
$23.9 $24.6 $25.6
$18.8
$20
$10
$0
$9.2 $11.1
$8.7
$7.8
$7.5
$7.1
$6.7
$4.4 $5.6 $5.6
Irene (2011) Jeanne
(2004)
Frances
(2004)
Rita
Tornadoes/Tornadoes/ Hugo
(2005) T-Storms T-Storms
(1989)
(2011)
(2011)
Hurricane Irene became the
12th most expense hurricane
in US history in 2011
Ivan
(2004)
Charley
(2004)
Wilma
(2005)
$13.4
Ike
(2008)
Sandy* Northridge9/11 Attack Andrew
(2012)
(1994)
(2001)
(1992)
Katrina
(2005)
12 of the 16 Most Expensive
Events in US History Have
Occurred Over the Past Decade
*PCS estimate as of 4/12/13.
Sources: PCS; Insurance Information Institute inflation adjustments to 2012 dollars using the CPI.
11
U.S. Natural Gas Marketed Production,
1900 - 2013
Million Cubic Feet
Hydraulic fracturing (fracking)
has pushed US natural gas
productions to record levels.
The U.S. is now the world’s
largest NG producer.
Source: U.S. Energy Information Administration, accessed 4/10/14 at http://www.eia.gov/dnav/ng/hist/n9050us2a.htm
12
U.S. Natural Has Imports and Exports,
1990 - 2040
Trillions of Cubic Feet
The US is now
the largest gas
producer in the
world, though
Russia is the
largest exporter.
The US needs to
invest in its
pipeline and
LNG
infrastructure
and expedite
regulatory
approval to
realize its full
export potential
Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute.
13
U.S. Crude Oil Production, 2005-2015P
Millions of Barrels per Day
Crude oil
production in the
U.S. is expected
to increase by
82.6% from 2008
through 2015
10
9
8
7
6
9.13
8.37
7.44
6.49
5.19
5.09
5.08
5.00
2005
2006
2007
2008
5.35
5.47
5.65
2009
2010
2011
5
4
3
2
1
0
2012
2013 2014F 2015F
Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
2/30/2
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
220
210
200
190
180
170
160
156.4
156.4
156.7
157.6
158.7
157.8
158.0
159.5
160.0
161.5
161.2
161.2
163.1
164.4
166.6
169.3
170.1
171.0
172.5
173.6
176.3
178.2
178.5
180.9
181.9
183.1
184.8
185.2
185.7
186.8
187.6
188.0
188.0
188.2
190.0
191.7
191.9
193.4
192.4
192.6
193.1
193.3
195.0
196.5
199.7
200.6
203.0
204.1
205.3
207.7
208.1
Oil & Gas Extraction Employment,
Jan. 2010—March 2014*
(Thousands)
Oil and gas extraction employment
is up 33.1% since Jan. 2010 as the
energy sector booms. Domestic
energy production is essential to
any robust economic recovery in
the US.
*Seasonally adjusted
Sources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.
Highest
since Aug.
1986
150
15
Insurance Industry Concerns Related to
Energy Infrastructure
 Grid Vulnerability to Physical (Terrorist) Attack
 April 2013 attack on PG&E substation in Metcalf, CA
 Question of public disclosure of such events per DOE IG report
 Expiration of Terrorism Risk Insurance Act 12/31/14
 Pipeline Risks
 Pollution/Environmental risks
 Offshore
 Remains a concern post-Deepwater Horizon
 Vulnerable to manmade and natural disaster risks
 Arctic Pollution
 New frontier
 Rail Transportation
 Concerns in the wake of several major, costly explosions
 Cyber
 “Data” policies available (protects value of digital assets)
 Management liability coverage (D&O) increasingly available
 Broad property and liability is not commonly available
Source: Insurance Information Institute research and Willis 2014 Energy Market Review.
16
The Spectrum of Political Violence
Including Terrorism
DISTURBING FACTS
•
In the US, 40% of all cyber attacks on
critical infrastructure assets in 2012
occurred against the energy sector
•
Globally, it’s estimated that cyber
attacks against oil and gas
infrastructure will cost oil and gas
companies $1.87 billion by 2018
•
The UK govt. estimates that oil and
gas companies in the UK already lose
~GBP400 million per year as a result
of cyber attacks
Sources: ICS-CERT; ABI; KPMG
The view is that eventually
terrorism risk could be
managed within the spectrum
of Political Violence risks,
which are a constant concern
in the global energy sector
Sources: 2014 Willis Energy Review, p.25.
17
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/bob_hartwig
Download at www.iii.org/presentations
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