Reinsurance gets caught up in sanctions fight

Reinsurance gets caught up in sanctions fight

The reinsurance industry is now playing a greater role in the enforcement of international sanctions, according to leading insurance lawyers. Sanctions against Iran and North Korea in particular have prevented many international reinsurers with operations in the US and the EU from offering any cover that may be in breach of the sanctions that have been imposed on those regimes. 

The sanctions against North Korea and Iran are primarily backed and enforced by the US, with the EU also announcing an oil embargo against Iran in January last year and taking effect this July. Therefore, while it is easy for the US government to prevent US companies from trading with these countries, it is difficult to enforce the sanctions if companies are domiciled in other countries and have no business operations within the US. If, however, a company also has operations in the US then penalties can be imposed on them for breaking sanctions.

However, there are plenty of companies that do not deal in the states and it therefore is very difficult to enforce sanctions against them. Clive O’Connell, London-based partner at Goldberg Segalla, explains this is where international reinsurance is likely to play a big role in the enforcement of sanctions in the future.
 
“Most major reinsurers operate at some way or other with the US. They have some form of asset in the US. Whether it is premiums due to them or reserves held there,” he says, claiming this has made reinsurers incredibly careful about sanctions and the possibility of breaching them.

The solution to this, O’Connell claims, has been “a fairly simple Gordian Knot cutting solution”. He continues: “And that is you basically don’t give cover for anything that could be in breach of sanctions. There is a limitation on the cover that you grant. You limit the cover that you give to insurers and they in turn have to limit the cover that they grant to the underlying insured, therefore the underlying insured knowing that they are not getting insurance protection have to take a very careful risk reward analysis when they are deciding whether or not to go forward with the activity.”

In the eyes of the US and European governments, the insurance and reinsurance industry is increasingly becoming a component of global diplomacy and the enforcement of global sanctions. This is particularly important when countries that are under sanctions are selling particularly desirable insured commodities such as oil.

“Sanctions are increasingly becoming a tool used by the US and European governments to advance their policy interests and insurers are increasingly viewed as a critical part of the sanctions regimes,” says Bill Marcoux, New York-based partner at DLA Piper. “The stakes are high, compliance is very difficult and the price for non compliance is great.”

Iran 

The potential unwillingness of insurers and reinsurers to cover risks in countries where sanctions are an issue has become increasingly important in recent weeks with regard to Iranian crude oil and its Indian importers. India is an important importer of Iranian oil. While market forces might lead to companies ignoring international sanctions and importing without insurance, this is particularly risky in the case of crude oil because of the dangers associated with its transportation, and therefore most Indian refineries have not been willing to import crude oil without insurance and reinsurance cover.

“Indian refineries were refusing to accept oil coming off ships that had loaded in Iran, because accepting that oil could be seen to be in breach of US sanctions, and as a consequence those refineries might not be covered. To operate a refinery you need to have insurance, and the insurers couldn’t give that insurance because they weren’t getting reinsurance and therefore cargos were denied,” explains O’Connell.

India is competing with China for Iranian crude, which has been particularly difficult because of China’s relative lack of concern for international sanctions imposed upon Iran. O’Connell notes that China has “sufficient insurance cover to protect against those sanctions and doesn’t look necessarily to the outside world to provide re-insurance cover to its internal insurers”.

Because of Indian demand for Iranian oil to continue to grow its economy, and partly in response to China’s own competitive demand for oil, India has come up with a unique solution to their reinsurance problems, notes O’Connell.

“They are looking to come up with some sort of reinsurance within India to protect Indian insurers that might want to give cover to refineries that which are importing and processing Iranian oil,” he says.

This move would undoubtedly be a way to avoid the US and EU sanctions as this operation would be entirely separate from those geographies and no companies would be able to be penalised.

a function of the Indian insurance market being essentially a closed market, so there is not a lot of capital there. You can see therefore why an Indian insurance company writing business in India would be concerned. When a refinery blows up that’s a big claim,” says Geoffrey Etherington, New York-based partner at Edwards Wildman.

According to Etherington, reinsurers’ reluctance to cover business with potential links to Iran proves the sanctions are working.

“As a political matter that’s a sign the toughened EU and US sanctions are really making a difference, because what’s happened is the reinsurers have said they want nothing to do with anything that has a hint of Iran on it, so they’re writing endorsements that exclude that business in the new contract years,” he says.

It is still unclear how the US, as an important trade partner to India, will react to India’s response to US sanctions.

“The Office of Foreign Assets Control has at least publicly, in some of its interpretations, adopted a very expansive reading of its authority.  They have suggested that they have an ability to sanction companies and persons who have no connection with the US and have no business in the US, merely because they are aiding a sanctioned country,” says Etherington.

He notes that this has led to the suggestion that if an Indian government-backed reinsurer ran funds through a US bank under a correspondent account, then Ofac could seize the funds within the account. While Ofac has not done this, potential for such an act is posing questions for many in the industry and adding fresh uncertainty for foreign insurers and reinsurers considering investing in India. Regulators in the EU are, however, not expected to follow this policy.

What is clear is that the sanctions are having an effect. Inflation in Iran has risen dramatically since the imposition of sanctions, and the resultant pressure that is being placed on the reinsurance market is likely to accentuate this trend.

North Korea 

While there a few countries that do not comply with sanctions imposed upon North Korea, they still receive a high level of economic support from China.

“The position of China on Korea is going to be the determiner of many things” says O’Connell. “North Korea had, like many other communist countries in the past, always used the international reinsurance market, because whatever ideology you follow there is always a need to protect against catastrophe.”

He adds that economic pressure from China could be a crucial factor in restraining North Korea’s provocative behaviour to its other Asian neighbours – particularly South Korea, its US ally, and nearby Japan.

While North Korea’s statist regime has prioritised military spending and other projects over reinsurance cover for other risks to the economy, O’Connell notes that through its  national insurance company, the Korea National Insurance Corporation (KNIC, formerly Korea Foreign), North Korea has traditionally purchased reinsurance through the London market and elsewhere.

“They are unable to buy this from the London market anymore because of the sanctions,” stresses O’Connell. “They will be buying from somewhere like China, if they can afford it. North Korea is entirely dependent for everything to sustain itself on China and China is very much part of the global economy.”

By Sam Kerr – sam.kerr@euromoneyny.com

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