The Financial Hedging Of Contributions By Oil Firms To The Iopc Funds

The liability and compensation for the damage caused by maritime oil spills have been regulated by the 1992 International Convention on Civil Liability for Oil Pollution Damage (1992 Civil Liability Convention) and the 1992 International Oil Pollution Compensation Fund Convention (1992 IOPC Fund). In this compensation regime, the contributions of oil firms to the IOPC Funds are based on the aggregate risk of the Funds and are assessed each time an oil spill is registered. In this paper, we present the main characteristics of such a compensation regime and explain why oil firms would benefit from hedging their contributions to the Funds through standard insurance combined with investment on capital markets. A simulation of a combined hedging strategy using stop-loss contracts is also proposed.