The Expected Impact of Oil Limitations on the Property-Casualty Insurance Industry

Using the principles of Biophysical Economics, together with the issue of resource constraints that the world is already facing (particularly with respect to oil), we show that the financial crisis that affected many industries in the 2008 -2009 period, including the property-casualty insurance industry, was not a one-off event. Instead, the financial crisis was closely tied to inadequate growth in world oil supplies, leading to higher prices of crude oil, which in turn affected credit markets, creating recessionary impacts.

If the growth in world oil supplies continues to be constrained, this analysis indicates that the recently-experienced financial crisis can be expected to be repeated, and get worse, resulting in impacts affecting many of the same lines of insurance as those affected during the 2008-2009 crisis.

As the restriction in oil supply becomes greater, we show bond default rates can be expected to increase greatly. These high default rates can be expected to lead to the eventual bankruptcy of companies writing financial guarantee insurance and result in erosion of capital of property-casualty insurers. An increase in bankruptcies of property-casualty insurance companies is indicated, quite possibly exceeding the capacity of guarantee funds.

Keywords: Biophysical Economics; bond default rates; financial crisis; oil; peak oil; recession; resource constraints; world oil supply