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Energy Market Update

Energy Market Update. Quarter 2, 2011. What is affecting our clients – Global economy. Global economic downturn then recession, slow recovery Oil price fluctuation - US$35 to US$147 Raw material price fluctuation (activity in India and China driving prices up), commodity markets up

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Energy Market Update

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  1. Energy Market Update Quarter 2, 2011

  2. What is affecting our clients – Global economy • Global economic downturn then recession, slow recovery • Oil price fluctuation - US$35 to US$147 • Raw material price fluctuation (activity in India and China driving prices up), commodity markets up • Funding for projects difficult to obtain, lending activity is still low • Exchange rates (EUR / USD) • Supply and demand for insurance product Aon Risk Solutions | EnergyProprietary & Confidential

  3. What is effecting our clients – capital costs Made up of what ? Aon Risk Solutions | EnergyProprietary & Confidential

  4. What is affecting our clients? – material costs 2007 – 2011 2003 - 2007 • Structural steel -3.8% +60% • Pressure vessels & h/exchangers -4.7% +40% • Compressors, pumps & valves +6.3% +30% • Pipe material +5.4% +100% • Control systems +1.1% +10% • Electrical Systems +6.0% +40% Aon Risk Solutions | EnergyProprietary & Confidential

  5. What is effecting our clients? – delivery times Why is this important ? Aon Risk Solutions | EnergyProprietary & Confidential

  6. 2009-2010 Background - Onshore Energy • Benign years for underwriters with low claims activity (despite Haiti Earthquake which had limited impact on Energy assets/insurance) • Softening market (reductions of 10% to 15%) but continued underwriter profitability. • Swiss Re Group 2010 net income US$863m • Munich Re 2010 net profit Eur2.4bn • Underwriters benefited from strong results from non-underwriting income streams such as improved investment income from the strengthening financial market. Aon Risk Solutions | EnergyProprietary & Confidential

  7. 2011 Significant Natural Catastrophe • Jan - US winter storms including tornado touchdowns and power outages. Estimates of US$1bn in damages. • Jan - Australian floods, an area larger than Great Britain and Ireland flooded in Brisbane alone. Australian Prime Minister Julia Gillard “AU$5.6bn in reconstruction costs”. Significant mining losses also reported. • Feb - 6.3 magnitude earthquake in Christchurch, New Zealand. Very shallow depth of 5 kilometres which struck at a distance of 10 kilometres from the city centre. New Zealand Prime Minister John Key, “we may be witnessing New Zealand’s darkest day”. Main impact on commercial property insurance. • Mar - Japan earthquake magnitude 9 which triggered a large tsunami the fourth strongest earthquake recorded since 1900. Aon Risk Solutions | EnergyProprietary & Confidential

  8. Downstream market capacıtıes and ratıng • 2010 Rates were declining and capacity up • 2011 Impact of Australian Floods and Canadian Tar Sands Loss? Japan Earthquake etc World Trade Center Financial Crisis Andrew Katrina/Rita North Ridge 6000 120 5000 100 4000 80 3000 60 2000 40 1000 20 0 0 11 YTD 93 94 95 96 97 98 99 0 01 02 03 04 05 06 07 08 09 10 Offshore Capacities Onshore Capacities Percentage of 1992 rates Aon Risk Solutions | EnergyProprietary & Confidential

  9. The Downstream Energy Market Aon Risk Solutions | EnergyProprietary & Confidential Then Q1 2011;Canadian Oil Sands, USD 1.000.000.000.Dow Chemicals (USA), USD 150.000.000.Escom (South Africa) USD 150.000.000.Brazilian Petrochemical USD 110.000.000.Vale ( Mining ) USD 750.000.000.Anglo American( Mining ) USD 400.000.000. USD 2.560.000.000. Japan little effect on “energy” but contingent business interruption is problem. Consequently, after many good years, 2011 does not look so good. Underwriters reducing lines on Natural Catastrophe

  10. The Fallout • Chartis announces US$1bn loss in quarter one after Japan and other catastrophic events. (Security downgraded) • Munich Re announces Eur1.5bn loss for the Japanese quake. • Industry braced for US$10bn insured loss in Japan net of Government cover with no estimate for reinsurance losses at this stage. • New RMS model released • Significant changes to the way accumulations are analysed by underwriters. • Speculation that underwriters may have greater accumulations than previously thought. • This may lead to reductions in natural catastrophe lines by underwriters or required them to buy increased reinsurance protection. • This could ultimately lead to increased rates on natural catastrophe exposed accounts. Aon Risk Solutions | EnergyProprietary & Confidential

  11. What about supply ? Aon Risk Solutions | EnergyProprietary & Confidential

  12. Onshore Capacity Changes – Key Markets Aon Risk Solutions | EnergyProprietary & Confidential

  13. What does this mean for the Energy Insurance Market in Q3/Q4 2011 ? • Oil prices still above US$100 per barrel • More confidence in investment • Economics • Interest rates still at historical lows • Lending conditions still tough • Demand • Increasing, ever bigger projects • Increased Business Interruption numbers leading to higher limits Aon Risk Solutions | EnergyProprietary & Confidential

  14. What does this mean for the Energy Insurance Market in Q3/Q4 2011 ? • Supply • Capacity is stable for small limit Non Natural Catastrophe • For Natural Catastrophe/poor loss record capacity is being squeezed • Rating Agencies • RMS 11 to become the normal model • Downgrades have happened as well as the odd upgrade • Consumer protection • Solvency II, capital ratios. Aon Risk Solutions | EnergyProprietary & Confidential

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