Self-insurance = no insurance?

This article explains a bit of BP’s (lack of) insurance policy.

“BP’s operations in the U.S. are self-insured, which means that the company is responsible for funding clean-up operations in the Gulf of Mexico that Fitch estimates could reach $2-3 billion[.]”

I don’t see how the concept of self-insurance applies in the case of BP’s gushing oil leak.  If they’re self-insured, isn’t that the equivalent of not having insurance?

For instance, Wal-Mart is self-insured, with vehicle liability as one component.  Their truck fleet is about 7,200 at last count.  They can fairly accurately estimate the number of accidents they’ll have in a day and set aside funds to insure themselves against resulting damages.

But humans are really bad at estimating and hedging against small probability risks, like an oil spill.  This was Nassim Taleb’s main point in The Black Swan.

Wal-Mart’s worst case scenario is probably a wreck with multiple fatalities.  That would be an awful tragedy but wouldn’t sink a company with $408 billion in revenue.  BP’s catastrophe poses a much greater risk to the company’s viability.  And I’m not convinced that it’s efficient for BP to bury enough money in the backyard to hedge against a massive oil leak or spill.

Apparently it may not be because BP is reinsured.  If that concept doesn’t make sense to you, don’t try reading the Wikipedia article.

Russ Roberts recently had Nassim Taleb on his podcast.  The interview is interesting throughout, especially the part when Taleb talks about his caveman lifestyle and refusal to put ice on his nose or go to the doctor when he recently broke it.  In his words, Mother Nature is the best healer.

Don’t think anyone would buy that explanation from BP though, just like I don’t think a cop would buy my new explanation if pulled over:

Oh, don’t worry officer, you don’t need to see any paperwork.  I’m self-insured

This entry was posted in International and tagged , . Bookmark the permalink.

2 Responses to Self-insurance = no insurance?

  1. Pingback: Self-insurance = no insurance? | Whiskey and Car Keys « blog01 – new life.

  2. Christina says:

    Eyjafjallajökull is neither self-insured nor self-assured.

Comments are closed.