<DrumBeat: September 2, 2006 The Oil Drum DrumBeat: September 3, 2006>

142 comments on Cornucopians - A Guide for the Perplexed

Comments can no longer be added to this story.

| Show without comments | PDF version

Gail the Actuary on September 2, 2006 - 5:02pm Permalink | Subthread | Parent | Comments top
There are quite a few peak oil issues affecting insurers and pension plans, that could lead to insolvencies. These include:

  1. Decline in asset values. Insurers and pension plans invest in bonds and in stocks. If there are many bankruptcies, or if the value of stocks decline, insurers will not have sufficient funds to pay claims when payments come due.

  2. Increase in inflation rate. Insurers collect premiums, and pay claims later, often several years later, if law suits are involved. If there is an increase in the inflation rate, costs may be higher than the insurer contemplated when setting the rates. (If benefits are fixed, as in many life insurance policies, the insurer will not have this problem. Instead, the benefits will be of less value to the policyholder, when it comes time to collect.)

  3. Arson. If oil becomes more expensive, homes in distant suburbs may be less in demand, and may be difficult to sell. There may be more fires of suspicious origin, if homes stand empty for long periods, or if collecting on the homeowners policy looks to be an easy way of getting rid of an unwanted property.  

  4. Business Interruption Claims. If businesses are not able to operate, because of utility or electric disruption, businesses may be able to collect on their "business interruption" policies.

  5. Increased Mortality and Morbidity. If oil is less available, the availability of healthcare is likely to decline. Medications will become more expensive, since most are hydrocarbon based. Poorer nutrition may also have an adverse effect. An increase in the suicide rate seems likely.

  6. Will the Monetary System Fail? Once it becomes clear to people that the amount of oil will continuously decline in the future, there is a question whether the current monetary system, based on loans and the promise of continued growth, can continue. Will banks be willing to offer mortgages and long-term business loans, if they think the likelihood of payback is low? If not, it would seem like the whole monetary system will crash. If this happens, insurers will not be able to make good on their promises, unless some outside source intervenes, and props up the whole system.

The 1974 oil shortages (which are small in comparison to what seems to lie ahead) lead to quite a number of insurer insolvencies, including the insolvency of one of my former employers.

This is a link to an article I wrote about the potential impact of oil shortages on the property and casualty insureance industry. Oil Shortages: The Next Katrina?

Comments can no longer be added to this story.
mbkennel on September 2, 2006 - 6:06pm Permalink | Subthread | Parent | Comments top

Appreciate the ideas.

I agree with most except healthcare re medications---the price of oil and even manufacturing itself is insignificant for medications.  The cost is in R&D and clinical trials and massive high-labor marketing BS by highly paid salesforce.

I do think that the effect on insurers of Peak Oil will be concentrated heavily through their portfolio investment side rather than their direct loss side.  

"Business interruption" may turn out to be a high-loss catch-all and I wouldn't be surprised if 'fuel and power shortages' start to get excluded or underwritten at higher rates.

Comments can no longer be added to this story.
totoneila on September 2, 2006 - 6:11pm Permalink | Subthread | Parent | Comments top
Hello Gail the Actuary,

Excellent essay!  Perhaps the Ins. Industry, with their billions [trillions?]of assests at risk postPeak, will take the MSM lead in alerting everyone and asserting the need for societal change. See my Shaw's Paradox posting below.  The Ins. Cos., more than any other capitalistic corporation, should have a huge vested interest in jumpstarting Foundation.  Predictive collapse and directed decline is the bread & butter of the actuary's skillset.

Bob Shaw in Phx,Az  Are Humans Smarter than Yeast?

Comments can no longer be added to this story.
Kevembuangga on September 3, 2006 - 10:37am Permalink | Subthread | Parent | Comments top
Medications will become more expensive, since most are hydrocarbon based.

Yes, but not directly for this reason, for most medications the cost of production proper is zilch, it's all R&D and marketing expenses.
There might be a longer lagging time for medications costs increases than for other kind of stuff.

An increase in the suicide rate seems likely.

That's what happened in the USSR crash, but isn't this a boon to insurers?

Comments can no longer be added to this story.
Gail the Actuary on September 3, 2006 - 3:18pm Permalink | Subthread | Parent | Comments top
Regrading whether suicides are a boon to insurers, it depends on what kind of coverage the insurer is selling. If the insurer is providing pension plans or lifetime annuities, suicides are a boon to insurers. It might even help with long-term-care coverage. If an insurer is selling either term life or whole life insurance, there is usually a two-year period after a policy is sold where suicide is not covered, but after that, suicide is a covered coverage.
Comments can no longer be added to this story.

142 comments on Cornucopians - A Guide for the Perplexed

Comments can no longer be added to this story.

| Show without comments | PDF version