Social, Economic, Political, and Climate Change: The Next 40 Years Liability Insurance Conference

1. Social, Economic, Political and Climate Change: The next 40 years Liability Insurance Conference at Robinson College, Cambridge Prof. Markku Wilenius, Allianz Group Development, Sept. 3th 2008

2. Introduction Overview of the world’s evolution to 2050 Target • Resources as population and energy will get scarce • What kind of societal choices should be done to achieve an economic growth in these future conditions? • Different scenarios outlining a pathway to complete this transition will be exposed for discussion Fact Scenarios Decoupling - Transition Economic growth Resources 2000 2050

3. BUSINESS AS USUAL -SCENARIO FOR GLOBAL DEVELOPMENT UNTIL 2100 ACCORDING TO LIMITS TO GROWTH -MODEL Persistent Pollution Resources Population Industrial Output Food Source: Meadows-Randers-Meadows 2004 12/19/2019 2

4. TRANSITIONS WE ARE FACING IN THE NEXT 50 YEARS… Informational Technological • Economic Demographic Social Institutional

5. 1 2 Faith put in the market to deliver economic advances, and social and environmental improvements: • increased role of the private sector • continued movement towards freer trade • commoditization of the nature Highly centralized approach to balance strong economic growth and a lessening of the environmental and social impact: • concerted efforts by government to solve problems facing the world (HIV, access to safe water, climate change etc.) 3 4 Emphasis on security which overshadows other values • increased limits on how people live • Situation driven by continued conflicts in the world and lack of resources for many individuals Assumption that actors: • at all levels (local, national, regional and international), • from all sectors (government, private and civil sectors) work together to address environmental and social concerns FOUR SCENARIOS FOR THE FUTURE • Based on both global and regional consultations involving many stakeholders • Four scenarios focus on implications of various actions at different levels for the future of human being and environment up to 2050 Market first Policy first Security first Sustainability first Source: The Global Environment Outlook 4 - UNEP

6. Five megatrends particularly relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

7. Five megatrends relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

8. Life expectancy Life expectancy Population (Rural/urban) Population (Rural/urban) Increased population - mainly in urban areas - mainly in security first model Life expectancy Population (Rural/urban) Life expectancy Population (Rural/urban) Increased life expectancy in all scenarios (to approx. 80 years) Demography Market first Policy first * Urban / Rural * * Security first Sustainability first * * World Africa Asia Europe Oceania North America South America

9. Demography • World’s population projected to reach 9.1 bn, plus or minus 2 bn • Between 2005 and 2050 : - population triplication in 12 countries (among the poorest on earth) • - half the global increase accounted for by just 9 nations • - loss of population in 51 countries (among the economically more developed) • Shift in the demographic balance between the more developed regions of the world and the less developed ones Age structure • One person in three will be 60 years or older in the more developed regions – one person in five in the less developed ones • Elderly dependency ratio of the least developed countries by 2050 = ratio of the most developed countries in 1950 Urbanization • World’s urban population doubling - from 3 billion to 6 billion • Mumbai : most populous region with 47 million inhabitants – Tokyo : 40 million inhabitants

10. What are the new risks emanating from demographic change? When more people impacted by damaging events (particularly in cities) – what does that mean for claims payments? With much older people forming the workforce in companies – will the nature of omissions/ actions change for which workers or their companies might be liable? Who can cover the workplace risks of all these workers in the future? Questions worth asking:

11. Five megatrends relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

12. Foreign aid – Bn $ Foreign aid – Bn $ Imports – Bn $ Imports – Bn $ Imports – Bn $ Foreign aid – Bn $ Imports – Bn $ Foreign aid – Bn $ Increased foreign aid mostly in the policy and sustainability first scenarios - directed to the same regions International trade will strongly increase after 2020 except in the security first scenario International trade will strongly increase after 2020 except in the security first scenario Strong increase in international trade after 2020 except in the security first scenario International trade will strongly increase after 2020 except in the security first scenario Globalization & Society Market first Policy first Security first Sustainability first Africa Asia Europe Oceania North America South America

13. Globalization & Society • economical and political integration within the regions – no global free trade zone achieved • economical collaboration between regions mainly between southern regions, e.g. Asia & Pacific, within Africa Poverty and Health • World become richer – Drop of the per capita income ratio in industrial nations to that in developing nations from 16 to 1 in 1990 to around 5 to 1 in 2050 • Average Chinese will be as rich as the average Swiss is today and the average Indian, as rich as today’s Israeli • If donor countries would keep their promise by giving 0.7% of their gross national product (GNP) for assistance, the poorest countries will be able to cut poverty by half by 2015 and to eliminate it by 2025 • Two first causes of DALYs (disability-adjusted Life-years) : Heart disease and depression Migrations • Increasing environmental refugees to 200 million by 2050 • More than 2 billion people will live in water scarce areas, desperate enough for mass migration Technology • Most people in the world will be connected to the internet after 2020

14. What are the new risks emanating from globalization? Who would have the capacities to cover damages to all that wealth? Will we see massive additional underwriting activities out of China or India? Questions worth asking:

15. Five megatrends relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

16. GDP per Capita Investment – Bn $ GDP per Capita Investment* – Bn $ Investment – Bn $ GDP per Capita Investment – Bn $ GDP per Capita GDP per Capita will globally strongly increase, except in the security first model in Africa Investments will increase after 2020, mainly in Asia. Investments will not be as high in the security first scenarios Investments will increase after 2020, mainly in Asia. Investments will not be as high in the security first scenarios Investments will increase after 2020, mainly in Asia. Investments will not be as high in the security first scenarios Investments will increase after 2020, mainly in Asia. Investments will not be as high in the security first scenarios Africa Asia Europe Oceania North America South America Economy & Finance Market first Policy first Security first Sustainability first World * Investment : in Agriculture, Energy, Materials, Manufactures, Services and IC Technologies

17. By 2050, the 10 richest countries will be : Economy & Finance • World’s gross domestic product : 220tn$ (45tn$ in 2000) - GDP per capita : 24,000 $ • China and India biggest creditors with an external credit of between 8tn$ and 11tn$ • Asia and Africa attract the most foreign direct investments with a CAGR respectively of 68% and 48% (2000 – 2050) Taxes, Prices and Consumption • Pension crisis as relevant challenge to face for most regions of the world • Massive tax increases to support the elderly and to prevent tremendous increases in countries’ debt – increased of the worldwide average tax rate of central governments from a ratio of 0.24 in 2000 to 0.44 in 2050 • Multiplication of the energy prices by 1.2 to 2.15 compared to the prices in 2000 • Multiplication of the global private consumption by 6.24 - around 121.2tn$

18. Will governments be able to pay for unexpected damage caused by goverment activities or omissions under such tight budget conditions? Will there be an increasing market/need to insure government activities? Will goverments be able to provide state guarantees for catastrophe risks such as terrorism or atomic risks? Questions worth asking:

19. Five megatrends relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

20. Power index Democracy measure - Index* Power index Democracy measure – Index* Asian and African political power will increase and the North American and European one will decrease Democracy measure – Index* Power index Democracy measure – Index* Power index Democracy will progress and be fully reached in most regions except in the security first model Africa Asia Europe Oceania North America South America Geopolitics Market first Policy first * The higher the more democratic Security first Sustainability first World

21. Country/Region USA China EU 27 Middle East India Military expenditures 2050 888.8 bn$ 646.6 bn$ 538.1 bn$ 435.4 bn$ 432.9 bn$ Geopolitics Statement / Evolution Consequences • Trend towards democracy • Democracies tend not to fight each other • More peaceful future among nation states • Rising birthrates in some of the world’s poorest, most unstable countries • Increased population of young people with limited economic prospects, pointing to growing geopolitical risks • Scarcity of natural resources as energy and water • Impact on the geopolitical climate • Increased implication of a common platform among UN organizations, the World Bank, the IMF, the WTO and other corporations and organization to address issues • Increased multilateral diplomacy and less bilateral conflicts • Worldwide expenditures for military multiplied by 4 to reach 4.078 tn$

22. In democratic countries, is there an obligation to guarantee basic human rights? Will nation states be able to fulfill guarantees such as a life in dignity? If not, will nation states be liable for that? Is that something they could or should cover? Questions worth asking:

23. Five megatrends relevant for insurance industry 1 Demography 2 Globalization and Society 3 Economy and Finance 4 Geopolitics 5 Resources, Environment and Technology

24. Water usage – Cubic Km p.a. Water usage – Cubic Km p.a. Water usage – Cubic Km p.a. Water usage – Cubic Km p.a. Constant increase in the water usage except in the market first scenario where water would be too expensive for the growing Asian population Raise of agriculture demand in most scenarios especially for biofuel and food World Africa Asia Europe Oceania North America South America Resources, Environment and Technology Market first Policy first Agriculture demand – Mil Met Tons Agriculture demand – Mil Met Tons Security first Sustainability first Agriculture demand – Mil Met Tons Agriculture demand – Mil Met Tons

25. Energy Demand – Bn Barr OE Energy Demand – Bn Barr OE C02-Emission – Bn tons p.a C02-Emission – Bn tons p.a Energy Demand – Bn Barr OE Energy Demand – Bn Barr OE C02-Emission – Bn tons p.a C02-Emission – Bn tons p.a Increased energy demand mostly in Asia and in the market first scenario Diminution of CO2 emission after 2040 – more efficient use in Asia. Emission remains the higher in Security and market first scenarios Diminution of CO2 emission after 2040 – more efficient use in Asia. Emission remains the higher in Security and market first scenarios World Africa Asia Europe Oceania North America South America Resources, Environment and Technology Market first Policy first Security first Sustainability first

26. Resources, Environment and Technology Statements for 2050 Solutions / Consequences Resources • Current oil reserves empty • New oil reserves in use only until 2075 • More than 2 billion people will live in water scarce areas • Raised world’s supply of non-polluting energy • Improved energy efficiency • Massive desalinization and seawater agriculture to produce biofuels and food Technology • Worldwide internet connection • Acceleration of the scientific and technological innovations • Processing power of a computer: in 2030 same as one human brain, in 2050 same asall human brains • Increased use of automated systems as telemedicine • Elimination of digital divide • Probable innovation in molecular manufacturing and 3D printing of objects = bytes shipping instead of atoms shipping • New ethical issues due to biotechnology and nanotechnology Environment • 14 billion tons of carbon per year rejected in the atmosphere • Current absorption capacity by oceans and forests is about 3.5 billion tons per year • Situation is unsustainable • Global warming boosted

27. Will scientific progress make in easier to proof that producers have caused a damage? Will acceleration of innovations result in risks emerging ever faster? How would that affect underwriting? Would underwriters rely increasingly on the good reputation of companies? Would it be necessary to extremely specialise as liability underwriters? Such as a liability underwriter for cycle producers only? Will large carbon producers be held liable for disappearing countries? Questions worth asking:

28. Conclusion Overview of the world’s evolution to 2050 Target Individual Market First Fact Decoupling - Transition Security First Policy First Globalization Protectionism Economic growth … welfare Sustainability First Resources Common 2000 2050 • The transition will probably lead to a different approach of the societal priorities : individual, common, protectionism or globalization • The key challenge is the coming age if scarcity • The search for welfare will replace the search only for economic growth • Major productivity gains in all sectors will be the key-input to achieve this transition

29. Are we just repeating the history? Hope not!

30. Thank you for your attention Markku.wilenius@allianz.com