BP has been 'rolling the dice on risk'
ft.com
Published June 17 2010 03:00
From Prof Alan Punter.
Sir, Nigel Ash (Letters, June 15) wonders why it is BP investors and not insurers that are taking the brunt of the potential financial consequences of the Gulf of Mexico spill. A large part of the answer lies in BP's Annual Report and Accounts, 2009, page 44:
"The group generally restricts its purchase of insurance to situations where this is required for legal or contractual reasons. This is because external insurance is not considered an economic means of financing losses for the group. Losses are therefore borne as they arise, rather than being spread over time through insurance premiums with attendant transaction costs. This position is reviewed periodically."
BP took this radical decision in early 1991 and a statement along the lines of the previous paragraph has appeared in its Annual Report and Accounts every year since. In essence BP has self-insured; that is, it has not bought insurance for any exposures of above $10m for the last two decades. The reasons given at the time included that insurance premiums paid over the decade 1980 to 1989 had far exceeded insurance losses recovered, that BP knew its risks better than any insurance underwriter, and that such risks were bearable by BP.
However, some observers believe that another significant factor in making this decision, not given publicly at the time, was a desire to cut costs and "roll the dice on risk". BP in the early 1990s was heavily in debt; the Financial Times in a story on August 10 1996 noted BP's "debt-induced crisis" when it cut its dividend in 1992.
This "self-insurance" strategy appeared to pay off during the 1990s, but in the next decade there has been a litany of events: three serious incidents at BP Grangemouth in May and June 2000; the 15 deaths and more than 170 injuries at BP Texas City in March 2005 ("Cost-cutting blamed for refinery explosion", FT March 21 2007); damage to Thunder Horse rig in the Gulf of Mexico in July 2005; the oil spill from a corroded pipeline in Prudhoe Bay, Alaska in August 2006 - and now Deepwater Horizon.
One reason for this series of lapses may be that, in not having to undergo the process and rigour of presenting and justifying its risk management programme and performance to insurance underwriters each year, BP has not benefited from having sufficient external expert advice on risk management - one of the non-financial benefits of buying commercial insurance.
Alan Punter,
Harpenden, Herts, UK
Copyright The Financial Times Limited 2010. |
