Swiss Re Advisors See Big Demand for Energy Risk Underwriting

November 29, 2006

Major global political and business leaders say energy issues are high on their agenda and that the demands and risk transfer needs of this sector pose challenges and opportunities for insurers and reinsurers.

At Swiss Re’s Centre for Global Dialogue, an advisory panel of economic and political leaders examined the global energy markets with regard to drivers and implications for energy security, the economic and political environment and financial markets. They noted that while many analysts consider the high oil price of recent years to be a risk factor for the global economy, it has led to rising investment in the energy sector, providing opportunities for asset management as well as for risk underwriting.

The price of oil, energy security and emission reduction are high on the agenda of political and business leaders and the potential implications for the global economy and financial markets may be significant, according to panelists. They noted that understanding the dynamics of the industry and the changes in the risk landscape – such as natural disasters, political risks, terrorist threats and environmental issues – are essential for capturing investment opportunities and satisfying the increasing needs for risk financing and risk transfer.

By providing new risk transfer mechanisms and putting a price on risk, the financial services industry plays an important role in the development of new technologies, locations and alternative energies, the Swiss Re report on the energy conference maintains.

Jacques Aigrain, chief executive officer of Swiss Re, said not all insurers and reinsurers are capable of responding to today’s energy markets.

“Those insurers and reinsurers with specialist skills across many disciplines, as well as superior financial strength, are best positioned to take advantage of the accelerating investment being made in the conventional and renewable energy markets,” he said. “The natural catastrophes which hit the Gulf of Mexico region in 2004 and 2005 have significantly increased the demand for risk protection. The overall loss to the oil and gas industry is estimated at $15 billion to $20 billion, making this the biggest insurance event in history for that industry.

“Since then, risk perception and the awareness of loss potentials among energy companies have increased significantly. The demand for catastrophe cover in the energy sector currently exceeds the appetite of the insurance market, and there is growing interest in transferring risks to the capital market through catastrophe bonds. At the same time, the underwriting of energy-related risks has become more challenging due to increased project complexity and the changes in the risk landscape.”

The currently high oil price is increasingly stimulating investment in oil and gas projects that were previously considered uneconomical. However, because of where the reserves are, the sheer scale of planning and the sophisticated technologies needed to get at those reserves, these projects have become extremely complex. noted: “The key uncertainty is the cost required to supply the market in the long run, not whether there are sufficient supplies,” noted Jeffrie Currie of Goldman Sachs, who gave a presentation at the Swiss Re meeting.

Analysing the security of supply, David Aaron of Rand Corp. furtehr defined the challenge. “The problem is not geology, but politics, or in other words disruption due to war, terrorism, regime change, embargoes or producer constraints, are a much bigger concern than scarcity,” Aaron said.

Global energy demand is forecast to increase by 50 percent between now and 2030, according to the International Energy Agency, led by strong growth in developing countries, particularly China and India. “Demand for oil in China, India and other emerging markets should surely be expected to continue growing, though whether it grows faster or slower than overall GDP will depend on whether serious efforts are made to boost energy efficiency and ease environmental problems,” Bill Emmott, former editor-in-chief of the Economist, commented.

The world economy in general, and the financial system in particular, is much better equipped today to deal with an oil price shock than it was in the 1970s and 80s. “Even a substantial and sustained increase in oil prices, while negatively impacting growth in economic activity, should be manageable,” maintained Paul Volcker, former chairman of the Federal Reserve Board.

The potential impact of an oil price shock on the global economy and financial markets would be a source of volatility for many businesses. As Swiss re CEO Jacques Aigrain emphasized: “Managing volatility holistically leads to more efficient use of capital, ensuring lower costs of capital, as well as higher and more consistent returns.”

Swiss Re has devised a variety of reinsurance and capital markets measures to manage volatility. One example is insurance-linked securities, which transfer catastrophe risks to the capital market and provide investors with an alternative asset class. Another recent example is a hurricane hedge Swiss Re put in place, using oil and gas financial instruments to hedge U.S. onshore hurricane risks.

Swiss Re’s Advisory Panel

The Swiss Re Advisory Panel was created in 2006. It meets twice a year at the Swiss Re Centre for Global Dialogue in Rüschlikon, exploring emerging issues and providing strategic insight into the business environment.

The members of the panel include:

* Peter Forstmoser, Chairman of Swiss Re and Chairman of the Advisory Panel, Zurich
* Jacques Aigrain, Chief Executive Officer, Swiss Re, Zurich
* Geoffrey L. Bell, President, Geoffrey Bell & Company Inc. New York and Executive Secretary, Group of Thirty
* Bill Emmott, former Editor in Chief, The Economist, London
* Roger Ferguson, Head of Financial Services, Swiss Re and Chairman of Swiss Re America Holding, New York
* Haim Harari, Professor and former President of the Weizmann Institute of Science, Rehovot, Israel
* Walter B. Kielholz, Executive Vice-Chairman of Swiss Re and Chairman of Credit Suisse Group, Zurich
* Anthony Salz, Executive Vice Chairman of N.M. Rothschild and Vice Chairman of the BBC Board of Governors, London
* Wolfgang Schürer, Chairman and CEO of MS Management Services, St. Gallen and Professor, Georgetown University, Washington D.C. and St. Gallen University
* Ulrich Suter, Professor and former Vice President for Research, ETH Zurich
* Tony Tan Keng Yam, former Deputy Prime Minister of Singapore and Deputy Chairman and Executive Director of the Government of Singapore Investment Corporation Private Limited
* Paul A. Volcker, former Chairman, Federal Reserve Board and Chairman of the Board of Trustees, Group of Thirty, Washington D.C.

Source: Swiss Re

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