By Frederick Collins
Dr. C.Y Thomas, in his column of Sunday 17th April last (https://www.stabroeknews.com/2022/04/17/sunday/guyana and the wider world/critiques-2-3-exxonmobil in the courts of law and public-opinion/) under the guise of a critique of ExxonMobil, continued his ridicule of those of us calling for guaranteed compensation in the form of insurance against any damage to the environment of Guyana and that of our Caribbean sister nations. His words were the following: “By moral hazard I refer to the well-known insurance risk management principle, which states that economic agents who seek protection from risk by way of insurance coverage may well choose to pursue a riskier pattern of behaviour after they are insured! As Investopedia states, the paradox is ‘when a party to a contract does not have to suffer the potential consequences of a risk the likelihood of a moral hazard increases’. Let’s hope the noise and nonsense brigade brings no harm to Guyana by their ill thought out pleadings/pressure for insurance, as ExxonMobil’s behaviour in cutting corners is certainly not comforting.”
Dr. CYT is an elder and economist, well respected among Guyanese and Caribbean academicians and beyond. It is therefore with reluctance that we are forced to pinpoint the logical fallacies of his argument.
He made this fallacious assertion in a season of dismissals of demands made by civil society as “nonsense.” The authority with which Dr. CYT is regarded lends a certain appearance of validity to his claims. This is not a person who was known to have a political purpose in launching feral blasts against civil society before the discovery of oil in Guyana. Nor is he in the race to benefit from the fees, the crumbs falling from Exxon’s table compared to the feast that is rightfully ours if the money comes in fair amounts and goes in the right places not as far as we know.
We have had cause to raise eyebrows at some of Dr. CYT’s en passant observations before but chose to remain silent given his credentials and esteem.
But there are so many problems with his assertion, captured above, that they cannot be left dangling in the minds of the public without response.
Essentially, Dr. CYT’s argument can be broken down as follows:
The call for insurance to provide substantial cover to match the substantial risk is ill thought out.
It is ill-thought out because it can make Exxon more inclined toward “cutting corners”, a behaviour for which the company has already demonstrated a propensity.
This is because of something called ‘moral hazard’ a well known principle that inclines people to neglect to protect themselves because someone else will pay.
This position is flawed because, first of all, there is something so obviously and egregiously wrong with this contention that we wonder what could have motivated Dr. CYT to make it. One can simply turn the statement inside out to see how illogical, and even ridiculous, it is. His argument implies that people should not be allowed, or made, to take out insurance to cover any risk whatsoever over which they have control, as they would use this knowledge to relax their vigilance over safety measures they would otherwise take. This would be so, since the same argument can be made for fire insurance, motor vehicle insurance, health insurance, and any other such currently insurable event that underpins the functioning of modern society.
Anyone who has taken out a mortgage on a house, or taken out a loan to buy a car, or even owned a car knows that he or she is required to take out insurance and should wonder where exactly the difference lies. The catastrophic size of the pollution risk only makes it more qualified for insurance. All the elements for moral hazard are present in these everyday policies but the insurance company still issues a policy. In every case above, the insured has the same control over his behaviour.
But in each case above there are two other elements at play the effect of which appears to have escaped Dr CYT completely. The first is the presence of a stakeholder. The second is the policyholder’s own interest in not triggering an action that would result in the covered event. This interest is not equal but acts in the opposite direction.
In the event of the mortgage, there are at least two stakeholders – the bank and the borrower himself who is also homeowner. He will lose materially if he behaves carelessly as in leaving his pressing iron on and going away and may even trigger unforeseen consequences like the loss of a life.
In the case of the car loan, there can be an employer as lender, as well as the road users his potential targets, and also himself.
Yes, the insured can be tempted to be careless, but he will wisely consider his own risk of loss before acting out his fancy. Guyana has had some spectacular cases of deliberate damage in order to claim (as in the famous case “Ahll gaan Lake.”). In this case, the insured may even incur criminal charges and loss of his reputation presuming it was worth anything in the first place.
So now we come to the oil company. In this case, as we develop subsequently, the presence of an insurance policy goes along with other statutory safeguards to protect the citizen stakeholders. As we will show in the Deepwater Horizon case, the oil company was forced to find the excess over what was considered at the time to be an “astonishing” amount of insurance (Some US$3billion). In jurisdictions with strong legal protection for citizens, the oil company would be forced to find any excess that the insurer did not pay. We would think that is a strong enough motivation to curb any inclination towards riskier behaviour on account of moral hazard. As at 2020, the total BP had to find from its own funds stood at US$75 billion. (Yes, US$3bn + US$72bn)
Dr CYT would have us believe that the mere insistence on insurance is likely to harm Guyana and it will be the fault of the “noise and nonsense brigade”- us, the civil society groups who insist on the insurance. Dr CYT cites Exxon’s inclination to cut corners but somehow can’t bring himself to attribute blame to them. Somehow, the watchdog is to be blamed for the behaviour of the transgressor.
We suspect that in the same way that most readers would instinctively sense the ridiculousness of his claim, they would similarly have a sense of déjà vu, of something else at play here. It is a tendency of weak Guyanese decision makers to lay some of the blame on the victim. A man is suddenly swinging at you with an axe and you automatically put up your hand to defend your face and you find yourself in the investigation being deemed to have contributed to the problem after all you pushed him by impeding his swing!
Let us be clear. His claim that moral hazard is present is valid. Again, his claim that an oil company can expose itself to more risk is also true. There can be no argument. Anything is possible. But the fact that something is possible does not mean it is likely.
But here is another problem for his contention: even if the oil company responds with an increase in risky behaviour, the insurers know how to address that kind of action.
The insurer has a raft of anticipatory as well as corrective and compensatory mechanisms present. The very fact that there is a profitable insurance industry means that insurers cater for this. In fact, insurers are experts at factoring this into their prices and designing the policy wording accordingly. Dr. CYT must have forgotten that there are people called actuaries employed by insurance companies who are responsible for a body of very complex mathematics to address all aspects of risk including moral hazard.
So these refutations alone begin to expose the ill-thinking as sitting squarely in the leveling of the charge against us rather than in our call for insurance.
But there is more to expose. Dr CYT is at least guilty of poor research in making his strange claim. In the next part we will address this.
As we said, Dr. CYT’s accusation comes at a time when people in high places who should know better are describing legitimate interventions of civil society as “nonsense.”
So we need to take the opportunity to address these attempts at devaluing and delegitimizing our voice. In subsequent parts we will touch upon a prophecy from the ancient county that has come true and, as well, a most outstanding example of civil society pressure being brought to bear to rescue the fishing industry of a country because the authorities were persuaded to pause, reflect, reconsider, and redesign.
(End of Part 1 of 5)
