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Insurance and Financial Hedging of Oil Pollution Risks

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Author Info
André Schmitt () (Laboratoire de Recherche en Gestion et Economie, Université Louis Pasteur)
Sandrine Spaeter
Abstract

The current international regime that regulates maritime oil transport calls for financial contributions by oil firms once an oil spill has occurred. Their percentage contribution to the International Oil Pollution Compensation Fund depends only on their level of activity. In this paper, we show that this compensation regime would be more efficient if contributing oil companies adopted financial strategies to hedge against oil pollution risks. The optimal coverage contract is such that standard insurance is useful to manage small and medium oil spills, while investments on financial markets help to cover large oil spills, less frequent but much more catastrophic for society. We also show that the prevention of oil spills increases when insurance is combined with a financial hedging strategy. This positive effect on prevention is further enhanced if firms have the opportunity to send signals about their risk-reducing activities to potential investors.

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Paper provided by Laboratoire de Recherche en Gestion et Economie, Université de Strasbourg (France) in its series Working Papers of LaRGE (Laboratoire de Recherche en Gestion et Economie) with number 2004-05.

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Date of creation: 2004
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Handle: RePEc:lar:wpaper:2004-05

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Related research
Keywords: Oil spill; legislation; insurance; capital markets; prevention; catastrophe.;

Find related papers by JEL classification:
D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Kenneth A. Froot, 2001. "The Market for Catastrophe Risk: A Clinical Examination," NBER Working Papers 8110, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Lanoie, Paul & Laplante, Benoit & Roy, Maite, 1998. "Can capital markets create incentives for pollution control?," Ecological Economics, Elsevier, vol. 26(1), pages 31-41, July. [Downloadable!] (restricted)
  3. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March. [Downloadable!] (restricted)
  4. Cormier, Denis & Magnan, Michel, 1997. "Investors' assessment of implicit environmental liabilities: An empirical investigation," Journal of Accounting and Public Policy, Elsevier, vol. 16(2), pages 215-241. [Downloadable!] (restricted)
  5. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  6. Dionne, Georges & Spaeter, Sandrine, 2003. "Environmental risk and extended liability: The case of green technologies," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1025-1060, May. [Downloadable!] (restricted)
    Other versions:
  7. André SCHMITT & Sandrine SPAETER, 2002. "Improving the Prevention of Environmental Risks with Convertible Bonds," Working Papers of BETA 2002-14, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
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  1. André SCHMITT & Sandrine SPAETER, 2005. "Hedging Strategies and the Financing of the 1992 International Oil Pollution Compensation Fund," Working Papers of BETA 2005-12, Bureau d'Economie Théorique et Appliquée, ULP, Strasbourg. [Downloadable!]
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