Corporate Insurance Strategy: The Case of British Petroleum

CORPORATE INSURANCE STRATEGY:
THE CASE OF BRITISH PETROLEUM

Presented by Group 6:
Catur Rini Ariyani
Heru Wijayanto
Kenneth Petersen
Saiful Anam
INTRODUCTION
• Insurable events represent major
production cost.
• Conventionally, buying insurance for large
potential losses while self insuring against
smaller ones.
• British Petroleum decided major changes
in insuring strategy.
• The article discuss insurance strategy on
demand side and supply side.
FRAMEWORK FOR EVALUATING
COERPORATE INSURANCE
• General framework for analyzing
insurance strategy, identifies benefits and
costs.
• Real benefits of insurance
• The supply side of corporate insurance.
The important difference between
individual and corporate insurance.
• Insurance allow to transfer risk to
insurance company.
• Insurance company charges a premium.
• Premium loading is difference between
premium and present value of expected
cost.
• Insurance company reduce the risk by
pooling a large portfolio of similar risks and
better access to capital market.
The real benefits of insurance
• Avoid under investment problem.

• Risk shifting within the firm.
• Service efficiencies.
• Tax Benefits.
• Regulatory Requirement.
Avoid under investment problem.
• Financial difficulty can impose large indirect
cost.
• Insurance effectively serves as a funding source.
• Alternative solution would be better to reduce
the amount of corporate debt.
Risk shifting within the firm.
• Employee demand higher wages.
• Management demand higher salaries.
• Suppliers will reluctant to enter into long-
term contract.
Service efficiencies.
• Insurance company provide a set of related
service.
• Insurance company has large data base that
allow for extensive and precise actuarial
analysis.
• It enable insurer estimate and classify individual
exposures more accurately and price their
product appropriately.
Tax Benefits.
• Benefits derive from interaction two
factors. Firstly is ability to reduce volatility
of reported income. Secondly is effective
progressivity of most of world’s tax code.
• Tax code permit deduction of both
insurance premium and of uninsured
losses.
Regulatory Requirement.
• Financial responsibility laws sometimes
require insurance coverage.
The Supply side of
corporate insurance
Effective Competition :
For routine small property and
liability losses →high competition
For large losses and for certain
specialized risks → less competition
For very high levels of all lines of
insurance → less competition and
higher expected insurer rents
The Supply side of
corporate insurance
Two well-known problems :
Moral hazard → the tendency for
insured parties to exercise less
care
Adverse selection → the
likelihood that insurers will get a
riskier than average sample, given
the tendency of less rizky parties
to self-insure
THE CASE OF BRITISH PETROLEUM
British Petroleum (BP) comprises four

operating companies:
 BP Exploration
 BP Oil
 BP Chemicals
 BP Nutrition
The Case Of British Petroleum
British Petroleum (BP) has asset include :
 Exploration and extraction licenses
 Scientific and technical capital specific to
the oil industry
British Petroleum (BP) has two major
concentrations oh value : Its production
licenses and its facilities
 In the North Sea
 On the Alaska North Slope
BP’s Loss Exposures
BP’s loss exposure range from routine small
losses to potential losses in the multi-billion-
dollar range.
 low scale : vehicle accidents, minor
shipping accidents, industrial injuries, small
fires, and equipment failures.
 large scale : refinery fires or explosions,
minor environmental damage from oil spills,
and loss of oil tankers.
BP’s loss exposures
 very large scale : clean-up costs arising
from major oil spills, tort claims for
widespread injuries caused by release of
toxic chemicals, liability for defective fuel
causing a major airline disaster, and loss of
an offshore rig with major loss of life.
With only one or two exceptions, insurance
has been unavailable above $500 million,
and BP has historically self-insured in this
range.
Coverage for losses below $10 mill
 Is decided by each local operating unit
 Competitive insurance markets
 Comparative advantage in claims
administration
 Reduces noise in performance measure
for local managers
 Potential tax benefits
Coverage for losses between
$10 mill and $ 500 mill
 No insurance using external
insurance market
 Limited competition in insurance
market
 Cost of enforcing contracts is high
 No comparative advantage for
insurers
 These losses have little impact on
total corporate value
Coverage for losses above $500 mill
• Size of loss exceeds capacity of

insurance market
• Coninsurance with tax authorities
• Increases oil prices
Summary/conclusion

Corporate Insurance Strategy: The Case of British Petroleum

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CORPORATE INSURANCE STRATEGY:

THE CASE OF BRITISH PETROLEUM

• Avoid under investment problem.

British Petroleum (BP) comprises four

• Size of loss exceeds capacity of

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