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Insurance and Financial Hedging of Oil Pollution Risks

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  • André SCHMITT
  • 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 BETA 2004-14, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2004-14
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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. Giovanni Dosi & Patrick Llerena & Mauro Sylos Labini, 2005. "Science-Technology-Industry Links and the ”European Paradox”: Some Notes on the Dynamics of Scientific and Technological Research in Europe," LEM Papers Series 2005/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. Nicolas Carayol & Pascale Roux, 2006. "A strategic model of complex networks formation," Working Papers of BETA 2006-02, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    4. Rachel Levy & Paul Muller, 2006. "Do academic laboratories correspond to scientific communities? Evidence from a large European university," Working Papers of BETA 2006-15, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    5. Murat Yildizoglu & Nicolas Carayol & Pascale Roux, 2005. "Coordination Failures in Network Formation," Post-Print hal-00160385, HAL.
    6. Jalal EL OUARDIGHI & Rabija SOMUN-KAPETANOVIC, 2006. "Convergence des contributions aux inégalités de richesse dans le développement des pays européens," Working Papers of BETA 2006-19, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    7. Stéphane Betrand & Kene Boun My & Alban Verchère, 2005. "Faire émerger la coopération internationale : une approche expérimentale comparée du bilatéralisme et du multilatéralisme," Working Papers of BETA 2005-13, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    8. Tapas K. Mishra, 2006. "A Further Look into the Demography-based GDP Forecasting Method," Working Papers of BETA 2006-17, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    9. 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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