By Frederick Collins
In Part 1 of our response to Dr. CYT, we pointed out that he had neglected to take into account some fundamental points concerning the nature of the insurance business. We pointed out that, even if the oil company decided to indulge in more risky behaviour as a result of taking out the insurance, the insurance business’ main genius is managing risks all kinds of risks, including moral hazard. They have had over 300 years of development of that expertise!
We also pointed out that, additionally, there would be intrinsic mitigation of any tendency towards riskier behaviour on the part of the insured. We also pointed out that he, having identified the behaviour of the delinquent, appeared to want to place blame on the watchdog rather than where it correctly belonged on the delinquent.
We will now expose the surprisingly poor research he did or the hasty conclusion he drew in order to make his awkward case. This is what he quoted from Investopedia: “when a party to a contract does not have to suffer the potential consequences of a risk the likelihood of a moral hazard increases”
This is what Investopedia actually says:
“What Is a Moral Hazard?
Moral hazard is the risk that a party has not entered into a contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity. In addition, moral hazard also may mean a party has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. Moral hazards can be present at any time two parties come into agreement with one another. Each party in a contract may have the opportunity to gain from acting contrary to the principles laid out by the agreement.” https:// www.investopedia.com/terms/m/moralhazard.asp
Now, the reader will notice that Dr. CYT’s version is a rather economical version of what the link to Investopedia provides. The first thing that we notice is that moral hazard can be present in the formation of the contract long before the insurance stage! So even without an insurance policy, the contract can be exposed to moral hazard. Masterclass articles describes it as an information asymmetry problem.
https://www.masterclass.com/articles/what-is-moral-hazard#why-is-moral-hazard-important
The trained insurance person immediately notices something wrong with Dr. CYT’s contention. The trained insurance person knows that moral hazard is a good-faith issue first and foremost. He knows that it is usually at play where one party to the contract knows more about the subject of the contract than the other party and uses it to his advantage. For example, the life insurance applicant knows more about his own health than the insurance agent writing the policy does.
The irony of this whole episode is that the entire relationship between Esso/Exxon and Guyana has shown signs of being riddled with information asymmetry, the chief component of moral hazard, from inception but Dr CYT only recognizes it as potentially at play if insurance is effected. Moral hazard has already wreaked havoc with Guyana! But Dr CYT does not care to recognize it! All we have to do is recall the now infamous absence of ring fencing in the contract.
And check who he wants to put blame on if harm comes to Guyana the people whose primary concern is putting Guyana in a place where the amount of our countrymen who can’t make ends meet is reduced, and where the country we leave behind for future generations is not the Niger Delta or Obiang’s hell.
MasterClass Articles
(https://www.masterclass.com/articles/what-is-moral-hazard#why-is-moral-hazard-important) shows us how the 2007/8 global financial crisis was a textbook example of moral hazard in banking. “The global financial crisis: The 2007–2008 global financial crisis was a textbook example of moral hazard in banking. Lower interest rates sent borrowers after cheap loans that lenders provided to banks that then sold them to investors. But when the Federal Reserve, or Fed, raised interest rates, the housing market crashed. Homeowners defaulted on their subprime mortgages, sending investors and banks into bankruptcy. The government’s attempt to lessen the damage caused a loss of trillions of dollars from the global economy.”
So, it is fiscal action, a subject of huge importance in Prof CYT’s own discipline that caused massive worldwide damage but not in insurance. Why would he, in the face of the risks to which our own National Resource Fund could be exposed in the international financial system, find time to donate to our much less risky calls for insurance?
We think that a considerable amount of the National Resource Fund will be placed in banks. If any harm comes to Guyana here, we trust he won’t blame us. We have been doing our best to reduce a lot of hazards at home.
Even the deployment of what should be less complex principles of economics his own discipline has risks. But it is still being taught, and rightly so, notwithstanding that the invisible hand the bedrock principle made famous by the father of economics Adam Smith in The Wealth of Nations, has become too invisible over time. Nowadays the only invisible hand is the one in our pockets from criminal pharmaceutical companies, criminal governments, criminal multinationals, and their well-dressed cronies and accomplices in high places!
Before we end this part, we will show that the Deepwater Horizon rig was covered for oil spill blowout but the presence of that insurance cover has not been identified as even contributory to the catastrophe. This point alone should independently provide a blowout of his case.
The Summer 2011 issue of NYSBA Torts, Insurance & Compensation Law Section Journal ( Vol. 40 | No. 1) an article titled “Gulf Coast Oil Spill Coverage Impact on the Insurance Industry” makes the following reference: “As quoted by Moody’s Investors Service on July 3, 2010, the cost of insurance policies covering deep water oil rigs has increased by more than 50% since the BP oil spill.”
From this extract we can see that:
1. There was insurance cover against oil spill
accidents whose source is oil rigs (as distinct
from transportation accidents)
2. This was in 2010 and was not as a result of a
call for insurance from anyone in GY.
It is merely left for us to establish that this Deepwater Horizon accident was not attributable to any safety net gymnastics on the part of the insured.
In a 2010 article, Arthur E. Berman says “There are many disturbing issues raised by the MC 252 well blowout. The Sixty Minutes report leaves the impression that there were clear indications of things that went wrong in the weeks leading up to the blowout. It further implies that BP and the other companies involved with the drilling operation ignored these problems in the interest of saving time and money.
I do not believe that there is sufficient and credible publicly available information to address those issues at this time.”
A Wikipedia article
(https://en.wikipedia.org/wiki/Deepwater_Horizon_explosion) boasting a last update of 31st March 2022 says “On November 8, 2010, the inquiry by the Oil Spill Commission revealed its findings that BP had not sacrificed safety in attempts to make money, but that some decisions had increased risks on the rig. However, the panel said a day later that there had been “a rush to completion” on the well, criticizing poor management decisions. “There was not a culture of safety on that rig,” co chair Bill Reilly said. One of the decisions that met with tough questions was that BP refuted the findings of advanced modelling software that had ascertained over three times as many centralizers were needed on the rig. It also decided not to rerun the software when it stuck with only six centralizers, and ignored or misread warnings from other key tests, the panel revealed.”
A slide briefly appeared on the Oil Spill Commission’s website and republished by The New York Times enumerating eight “risky” and “unnecessary” steps that BP was deemed to have taken.”
This blowout would have generated a mountain of investigation and we cannot claim to have exhausted all the reports. However, nothing we have seen even remotely suggests that corner-cutting was due to anything other than an urge to save time and increase production.
In Part 3 –we will show using extracts from a 2012 sample insurance policy that the oil industry protects those whose assets they contract to use by appropriate insurance policies. In other words, the oil industry takes care to protect itself and its foreign stakeholders. It appears that Dr. CYT somehow manages to raise a concern with our call for insurance which is intended to protect local stakeholders. We doubt that that could have been his intent. But that would be the clear result.
(End of Part 2 of 5)
