A “Noise and Nonsense” Brigader responds to Dr. C.Y. Thomas – Part 3
(Editor’s note: This is the third instalment in a fivepart series. The first two instalments appeared on May 10 and May 11. Stabroek News inadvertently omitted to state that these were TIGI columns.)
In part 1 we showed that insurance companies knew how to mitigate the risk of ‘moral hazard’ so that while the tendency of the insured to benefit financially from information asymmetry existed, it could never ever be enough to frustrate a properly functioning insurance market. In part 2 we presented the quote Dr CYT should have accessed and included the parts he omitted. These fuller quotes said that one did not need to effect insurance to be affected by moral hazard. We also pointed out that the main ingredient of moral hazard, information asymmetry, was likely at work since the very beginning of Guyana’s relationship with Esso/ Exxon.
In this part we expand on moral hazard operating outside of the insurance business.
Masterclass Articles tells us that “Banks and businesses may indulge in moral risk because they believe the US government will give them a safety net if the financial market experiences a crash due to their risktaking. The result is a win-win for businesses—risktaking can yield greater profits but is also covered by bailout—but a loss for taxpayers, who foot the bill when these risky investments upend the economy.”
This is moral hazard operating outside of the insurance industry. Let us emphasize again that while that industry is prone to the effects of moral hazard it is far from the only industry. In fact, the quotation from Masterclass above is very relevant to Guyana. At a recent Moray House presentation, we said we were against PPP. No, not the party, but the Public Private Partnerships as a means of financing the gas to shore project and similar ventures. The reason was that in these arrangements, the benefits tended to be privatized and the costs socialized – that is, borne in devious ways by the public.
This is moral hazard at work even before there is any consideration of insurance. We hope that by now it is becoming clearer that Dr CYT’s concern with moral hazard as a result of oil spill insurance is disproportionate and thoroughly misplaced.
We show now that there is insurance cover provided by the oil industry to protect its foreign stakeholders. Here are sections of a specimen insurance policy dated 2012. Yes, a specimen insurance policy for the oil industry. Dr. CYT does not appear to be too concerned about moral hazard in that industry if civil society does not call for it.
SECTION I – SCOPE OF THE POLICY
Risks covered
This policy covers all risks of accidental physical loss of or damage to the Insured Vessel occurring within the policy period, together with third party liabilities, costs and expenses, on the terms, conditions, restrictions and exclusions set out below.
Physical loss of or damage cover
Subject to the provisions and exclusions of this policy, this policy covers all risks of accidental physical loss of or damage to:
A/ The insured Vessel…includes the hull, … Leased equipment…This insurance covers all parts, equipment, navigation instruments, …c/ parts taken off the vessel …
– Physical loss of or damage cover, loss of use or deprivation cover When caused by one of the above risks and subject to the provisions and exclusions of these War Conditions, are covered: 1.1.1 Physical loss of or damage to the Insured Vessel (as described in Article 1.1.1 A, B and C of the Marine Conditions) even when resulting from: scuttling, deliberate fire or destruction or deliberate damage ordered by:
• The Authorities of the State where the Assured’s head Office or the Insured Vessel’s Owner is registered, or
• The Authorities of the vessel’s flag State or of the State where the vessel is registered, or
• The Authorities of any other State to prevent or mitigate either a pollution hazard, damage to the environment or other damage to its territorial waters…
As is readily seen, insurance is available for all kinds of risks, and even states require these to protect against pollution and other environmental damage.
Those would be normally functioning states that do not take the side of the oil company against the people, or shout down advocates, or where there is a willingness of the professional class to be coopted by special interests.
If advocacy for this is what is meant by “noise and nonsense”, we plead guilty. Notice that all the business stakeholders have their investment and assets covered by insurance. Here is a further extract from Gulf Coast Oil Spill Coverage Impact on the Insurance Industry: “The estimations assessed against insurers and reinsurers are astounding. Total insured losses from the worst oil spill in U.S. history are expected to be between $1.4 billion and $3.5 billion. For instance, Partner Re has estimated its losses will be in the $60$70 million range; Munich Re follows with $80 million; Hannover Re with $53 million and Swiss Re predicts the heaviest loss in the industry, estimating a $200 million loss from the disaster.”
What this means is as follows:
BP and its partners had actually effected insurance to cover its risks.
The total insurance payout was expected to be only $3.5 billion (described as “astounding”)
However, the total amount of expenses incurred by BP (US$75 billion) was to far exceed the amount of insurance effected. This is according to Deepwater Horizon a decade on: What happened in the infamous oil spill (Murray – April 2020) https://www.nsenergybusiness.com/features/deepwater-horizon-oil-spill/
So, where did this extra amount of US$71.5 billion come from and why should we care? It came out of the coffers of BP – its own assets. In other words, the effect was the same as if British Petroleum had self-insured.
From what we could gather, this was not a choice, but simply the result of coverage being unavailable for more than $3.5 billion (which was considered in 2010 as “astounding”). Again, from what we could gather, insurance beyond the amount effected was simply not available. In order for the insurance industry to insure a risk it must be measurable. Apparently, the Deepwater Horizon would have confirmed that the extent of damage possible from an oil rig blowout is either unpredictable or too high to be fully covered.
(Incidentally, this presents another reason for our corner-cutting insured oil company to want to curb his tendency. He has no idea of the limits of what he would have set in motion)
If it is not immediately apparent why we should care is that the figure of US$75 billion represented the assessment of the expenses necessary to clean up the environment and compensation for lives, earnings, and property lost. Let us suppose that currency adjustments would take that figure down to US$30 billion including damage done to Guyana and the Caribbean.
Who will be able to prise that amount out of the hands of the oil majors? After how much litigation? After how many decades? After how much behind the scenes and under the table intrigue?
In part 4 we will expand on what we really mean when we call for “insurance.” We will also address Dr CYT’s apparent lack of regard for the court of public opinion especially in the light of an accurate prediction made by stakeholders in Berbice.
(End of Part 3 of 5)