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Insurance and Financial Hedging of Oil Pollution Risks

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  • 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.

Suggested Citation

  • André Schmitt & Sandrine Spaeter, 2004. "Insurance and Financial Hedging of Oil Pollution Risks," Working Papers of LaRGE Research Center 2004-05, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.
    • Handle: RePEc:lar:wpaper:2004-05
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    File URL: http://ifs.u-strasbg.fr/large/publications/2004/2004-05.pdf
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    References listed on IDEAS

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    Cited by:

    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, UDS, Strasbourg.
    2. Dong, Bingying & Zhu, Ling & Li, Kevin & Luo, Meifeng, 2015. "Acceptance of the international compensation regime for tanker oil pollution – And its implications for China," Marine Policy, Elsevier, vol. 61(C), pages 179-186.

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    More about this item

    Keywords

    Oil spill; legislation; insurance; capital markets; prevention; catastrophe.;
    All these keywords.

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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