Energy Infrastructure and Vulnerabilities

Insurance Market PerspectivesU.S. Department of Energy

Quadrennial Energy Review Public MeetingWashington, DC

April 11, 2014Download at www.iii.org/presentations

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

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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

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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)

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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

354.8

523.9

629.8

729.2

819.6

406.0

0

100

200

300

400

500

600

700

800

900

1990 2000 2010 2020P 2030P 2040P

World Primary Energy Consumption, 1990-2040P

Source: Energy Information Administration, 2013 International Energy Outlook, Insurance Information Institute.

Between 2010 and 2040, energy consumption in projected to increase by

56.4% worldwide

Quadrillion BTUsGrowth in worldwide

energy consumption will create more risk and

vulnerabilities (natural and manmade); Innovations in

risk management and insurance are needed.

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.

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US Electric Power Generation by Fuel Source, 2010-2035F (Billions of Kilowatt Hours)

3225 26 26 27 27

776903 874 882 983 1,074

807 830 887 917 914 887390 504 544

579594 630

1,799 1,531 1,604 1,710 1,757 1,803

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2010 2015 2020 2025 2030 2035

Coal Petroleum Natural Gas Nuclear Renewable Other

Source: US Energy Information Administration, Annual Energy Outlook 2012, Appendix A7.

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

3,806 3,796 3,9374,118 4,279 4,427

The Past Few Years Have Not Been Kind to Insurers or Utilities

8Source: Insurance Information Institute research.

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

Superstorm Sandy: Oct. 29-30, 2012

Insured Losses: $18.8 Billion Customers w/o Power: 8.1 Million

9

$1

2.6

$1

1.0

$3

.8

$1

4.3

$1

1.6

$6

.1

$3

4.7

$7

.6

$1

6.3

$3

3.7

$7

3.4

$1

0.5

$7

.5

$2

9.2

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$1

4.4

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3.6

$3

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$1

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$4

.8

$8

.0

$3

7.8

$8

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$2

6.4

$0

$10

$20

$30

$40

$50

$60

$70

$80

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*

U.S. Insured Catastrophe Losses

*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.

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.

2012 was the third most expensive year ever for insured CAT

losses

Record tornado losses caused

2011 CAT losses to surge

($ Billions, $ 2012)

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Inflation Adjusted U.S. Catastrophe Losses by Cause of Loss, 1993–20121

0.1%

1.7%

3.8%4.7%

6.3%

7.1%

36.0%

40.4%

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 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, $158.2

Fires (4), $6.5

Tornadoes (2), $140.9

Winter Storms, $27.8

Terrorism, $24.8

Geological Events, $18.4

Wind/Hail/Flood (3), $14.9

Other (5), $0.2

Wind losses are by far cause the most catastrophe losses,

even if hurricanes/TS are excluded.

Tornado share of CAT losses is

rising

Insured cat losses from 1993-2012

totaled $391.7B, an average of $19.6B per year or $1.6B

per month

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Top 16 Most Costly Disastersin U.S. History

(Insured Losses, 2012 Dollars, $ Billions)

$7.8 $8.7 $9.2 $11.1$13.4$18.8

$23.9 $24.6$25.6

$48.7

$7.5$7.1$6.7$5.6$5.6$4.4

$0

$10

$20

$30

$40

$50

$60

Irene (2011) Jeanne(2004)

Frances(2004)

Rita (2005)

Tornadoes/T-Storms

(2011)

Tornadoes/T-Storms

(2011)

Hugo (1989)

Ivan (2004)

Charley(2004)

Wilma(2005)

Ike (2008)

Sandy*(2012)

Northridge(1994)

9/11 Attack(2001)

Andrew(1992)

Katrina(2005)

Hurricane Sandy became the 5th

costliest event in US insurance history

Hurricane Irene became the 12th most expense hurricane

in US history in 2011

Includes Tuscaloosa, AL,

tornado

Includes Joplin, MO, tornado

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.

Source: U.S. Energy Information Administration, accessed 4/10/14 at http://www.eia.gov/dnav/ng/hist/n9050us2a.htm 12

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.

U.S. Natural Has Imports and Exports, 1990 - 2040

Sources: US Energy Information Administration, Annual Energy Outlook 2014 Early Release Overview; ;Insurance Information Institute. 13

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

5.19 5.08 5.005.35 5.47 5.65

6.49

7.44

8.37

9.13

5.09

0

1

2

3

4

5

6

7

8

9

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

U.S. Crude Oil Production, 2005-2015P

Source: Energy Information Administration, Short-Term Energy Outlook (April 8, 2014) , Insurance Information Institute.

Millions of Barrels per Day

Crude oil production in the U.S. is expected to increase by

82.6% from 2008 through 2015

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Oil & Gas Extraction Employment,Jan. 2010—March 2014*

*Seasonally adjustedSources: US Bureau of Labor Statistics at http://data.bls.gov; Insurance Information Institute.

156.

415

6.4

156.

715

7.6

158.

715

7.8

158.

015

9.5

160.

016

1.5

161.

216

1.2

163.

116

4.4

166.

616

9.3

170.

117

1.0

172.

517

3.6

176.

317

8.2

178.

518

0.9

181.

918

3.1

184.

818

5.2

185.

718

6.8

187.

618

8.0

188.

018

8.2

190.

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1.7

191.

919

3.4

192.

419

2.6

193.

119

3.3

195.

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6.5

199.

720

0.6

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4.1

205.

320

7.7

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150

160

170

180

190

200

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220

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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.

(Thousands) Highest since Aug.

1986

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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.

The Spectrum of Political Violence Including Terrorism

Sources: 2014 Willis Energy Review, p.25. 17

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

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

www.iii.org

Thank you for your timeand your attention!

Twitter: twitter.com/bob_hartwigDownload at www.iii.org/presentations

Insurance Information Institute Online:

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