This article was originally written for Insurance Day, Issue 4557, March 2016
What Iranian entities and risks can be insured and reinsured? Which are the areas of greatest concern for the market currently?
With Iran’s impressive oil and gas output, the marine and energy sectors are regarded as important areas of focus for Insurers and Reinsurers. As a result of the release of EU sanctions, or the lifting of “restrictive measures,” as it is known, EU Insurers and Reinsurers are now able, in principle, to provide cover to oil companies, as well as to cargo owners, ship owners and port authorities. The activities and associated services which are no longer prohibited extend to financial, banking and insurance measures and include the oil, gas and petrochemical sectors, shipping, shipbuilding and transport sectors.
Concern arises from the ongoing effect of the various US sanctions against Iran which remain in place owing perhaps to US uncertainty about whether investment in the region may facilitate terrorism. For US Persons, most sanctions against Iran remain. A US Person means any US citizen or entity organised under the laws of the US. An entity that is owned or controlled by a US person and established or maintained outside the US is eligible to participate in certain transactions involving Iran but the reluctance by US Banks to make loans for projects in Iran is having a detrimental effect on the risk appetite of EU Insurers and Reinsurers, even those in the London market with no connection to the US.
A measure of the uncertainty surrounding the permanent lifting of sanctions is illustrated by the fact that some P&I Clubs have advised their Members to be cautious when entering into contracts involving trading to or from Iran or involving Iranian entities. They have been advised to incorporate language into their contracts allowing for termination at short notice in the event of sanctions being reintroduced. This may be a sign of lack of confidence. Despite this, EU Insurers and Reinsurers are still expressing an interest in writing business in Iran and it was announced last month that one US Insurer has obtained US Government special authorisation to cover Iranian oil cargos representing a new phase in the thawing process.
The Joint Comprehensive Plan Of Action (JCPOA) contains a snap-back provision, allowing the EU and US to reinstate sanctions related to the Iran nuclear programme. How will the snap back be introduced (will there be an advance warning, what dispute resolution mechanisms are inbuilt into the JCPOA and could sanctions be re-imposed with retroactive effect).
The “snap-back” mechanism for re-imposing sanctions contained in a United Nations Security Council Resolution, comes into force if Iran fails to comply with its obligations under the JCPOA. When details emerged around April 2015, there was initial scepticism as to how such a mechanism would be effectively triggered in practice, whether a third party body would be responsible for determining Iran’s alleged misconduct, and if so, which body? In actual fact, the mechanism appears to have some teeth.
An allegation that Iran has breached obligations can be brought before the UN Security Council which in turn can require Iran to remedy the breach. In the event of a reintroduction of measures, the UNSCR will not apply with retroactive effect to contracts signed prior to the snapback date. It is hard to predict precisely how such policies will work in practice.
How will the Iranian sanctions issue develop over the next three years and what are the likely key developments for insurers and reinsurers?
As long as US sanctions remain in place, trade and investment from the US and EU will be minimal. EU sanctions relating to arms embargo, missile technology, certain nuclear transfers, metals and software remain in place. There are still a number of persons and entities left on both the UN and EU consolidated lists which remain in force, with whom it is illegal to do business with. The opening up of a new market in Iran will be a slow burner. Chinese and Indian banks and Insurers and Reinsurers outside the scope of the sanctions regimes are likely to steal a march on their EU and US counterparts by moving forward with business transactions in and out of Iran.
DWF’s record of advising on compliance with sanctions
DWF advises international traders, charterers, shipowners and their Insurers and Reinsurers on issues arising from sanctions and cross border economic restrictive measures. Such advice takes various forms including drafting sanctions based wording for insurance policies, creating sanctions committees in commodities companies and Mutual Insurers, and acting in sanctions disputes in arbitration and litigation.