Rising Energy Prices Will Affect Insurance Ratemaking
NEW ORLEANS, La.—The leveling off of the world’s oil supply and the resulting rise in gasoline prices and their economic impact carry implications for actuaries involved in insurance ratemaking, as described at the CAS annual Ratemaking and Product Management Seminar, held March 20-22, 2011.
“In terms of how these issues are already affecting insurers, remember the Deepwater-Horizon oil drilling platform blowout that happened in the Gulf of Mexico last year, the nuclear meltdowns in Japan this year, and the recession of 2008-2009,” said Gail Tverberg during the RPM Seminar session “Actuarial Implications of Current Energy and Related Economic Issues.”
“We knew there was a correlation between oil price spikes and recessions,” she pointed out. “Since World War II, there have been 12 oil price spikes and 12 recessions. Eleven of the oil price spikes immediately preceded recessions, so we only have one of each that didn’t get explained by the other.”
Recessions affect insurers in many ways, said Tverbeg. Reduced auto claims affect auto insurance, high unemployment affects workers compensation insurance, and falling home values and unoccupied homes affect homeowner insurance. There are also reductions in the amount of investment income insurers can earn. On the other hand, new insurance coverages emerge, such as for solar panels and electric cars.
Tverberg outlined the connections and interrelated problems between energy and exponential growth that she said is fundamental to the current economic system. Among them are that population growth corresponds very closely to growth in fuel use and that food prices also correlate closely with oil prices.
“We are reaching limits in many areas,” she noted. “Fresh water is limited, oil and natural gas are becoming more expensive to extract, soil is suffering depletion and erosion, and capital for solutions is limited.”
“In terms of implications for ratemaking, we should expect more recessions, or a shift from slow growth to recession and back again, but I think the general direction is going to be in terms of more recessions,” she said. “We should also expect that governments are going to be in worse financial shape, so they may not repair roads as well, they may default on their bonds, and they may not be able to fix damage after catastrophes.”
The potential impacts on catastrophe pricing are that following natural disasters, governments are likely to be slower to fix roads and provide basic services, so business interruption claims may go on longer than they would otherwise. Government intervention in settlements may occur, as in the Deepwater Horizon oil spill, she noted.
"With rising oil prices having the potential to push up long-term inflation rates and defaulting bonds possibly causing investment returns to be far below what was anticipated, the long-term outlook for long-tail insurance lines is dim, resulting in insurers returning to short-term, quick payout lines,” said Tverberg.
“The basic issue is that exponential growth cannot continue in a finite world with oil being a major variable, along with population, water supplies, and the financial system. A clear solution does not exist,” she concluded.
Presentation slides from the RPM Seminar are available through the CAS Web Site, including Tverberg’s presentation.