The Iran effect

For the first time, sanctions against Iran have specifically targeted insurance. Article 26 of the EU regulations, published in October last year, prohibits the provision of insurance or reinsurance to Iran, its government, public bodies, corporations and agencies, and to any Iranian people or entities.

The legislation took effect immediately, so applies to all policies issued after 27 October, the date it was issued. Policies written before that date have also been affected – any claims by Iranian parties will now have to be checked by the authorities. Payments above a certain amount need to be authorised and may be prohibited if they are intended for “persons or entities whose assets are frozen by the regulation”.

With severe penalties for breaches, many underwriters are avoiding renewing or writing business lines that could get them into trouble. For example, many marine underwriters and protection and indemnity (P&I) clubs are refusing to take on business that contains Iranian risks even though that means turning down work.

“A lot of clients are saying it’s just not worth the risk,” says law firm Clyde & Co partner Mike Roderick.

But working out whether sanction laws apply in particular situations is not an easy task, particularly for treaty reinsurers, which typically underwrite broad books of business from all over the world. Finding the potentially conflicting Iranian element within a typical treaty book is like trying to find the proverbial needle in a haystack, underwriters say.

Insurers, therefore, are worried on three counts: about the work they will lose out on, the complexity of the new rules and the consequences of breaching them.

Loss of business

The latest legislation emerged in response to the USA enacting the Comprehensive Iran Sanctions, Accountability and Divestment Act 2010 (CISADA) on 1 July 2010. Among other things, this affected non-US insurers and non-US ship owners and ship charterers that provided insurance and transportation services for trade with Iran. Following the CISADA, the UN, EU and UK issued their own sanctions against Iran along similar lines.

So far, though, market bulletins and briefings from representative committees and legal advisers have done little to clarify the new legislation or reassure nervous insurers.

Their primary fear is that they will lose out on business. For instance, when UK insurers were banned from dealing with the Islamic Republic of Iran Shipping Lines (IRISL) in October 2009, the shipping firm looked to Russia, the Far East and local markets for its P&I and marine hull cover.

It is understood that it eventually secured cover from Moallem Insurance Company, an Iranian carrier set up to provide marine insurance to IRISL vessels.

Insurers are worried about how much more of their business the new regulations will put at risk. P&I clubs, including Steamship Mutual, Britannia, American Club, London Club, UK Club and Skuld, have all issued warnings that they will not be able to insure certain vessels, and several P&I clubs are believed to have lost business with Iranian shipping company NITC.

Roderick, however, is not convinced that the market will miss Iran. “They can do without it,” he says. “The world’s a big place and there’s plenty of other business. They can do without Iran.”

A new ball game

But what about companies that breach the sanctions? All signs indicate that the USA – the driving force behind them – and the UK government, which will be responsible for enforcing them under EU regulations, will take violations very seriously.

The market is still trying to make sense of the layers of legislation, and companies found breaching sanctions could be made an example of. Nobody in the London market wants to be the first to test them. “Somebody could end up in jail or there could be a hefty fine,” says Roderick.

“We had a delegation over here from the USA as part of a learning process when this first came out, making it clear how seriously they took these issues,” says Lloyd’s Market Association head of underwriting Neil Smith. “Lloyd’s itself is particularly sensitive about any breach of US sanctions, because the US is a big market for us and we have trust funds there.

“Also, from a reputation point of view, Lloyd’s very fiercely guards its position with regards to compliance with sanctions.”

Both the USA and UK are focusing more energy on applying sanctions to insurance, Smith says. “At one stage insurers might have looked at it from a commercial point of view and decided they could take the risk,” he says. “But these days that’s not the case – particularly from a Lloyd’s perspective. Lloyd’s managing agents have to be seen to be doing everything in their power to not breach these sanctions. The risk of losing the necessary licences or the reputational risk is just not worth it.”

The trouble is that the unfamiliar and complicated nature of the new legislation means that many may unwittingly end up on the wrong side of the law. “We’re in really unknown territory, because it’s the first time we’ve had sanctions legislation like this,” says Roderick.“In the past, you tended to have sanctions against specific people or against the import and export of specific products, but there’s never been a general ban on the provision of insurance. As far as insurers and reinsurers are concerned, it really is a new ball game.”

For example, there is concern that marine and cargo underwriters could be unable to offer cover to any vessel heading to Iran to deliver goods or cargo. While the EU legislation includes an exception for vessels, aircraft or vehicles temporarily visiting Iran’s airspace or territorial waters, underwriters are reluctant to provide cover. Roderick adds: “If you were in that situation, what would your reaction be? It should be, ‘If in doubt, don’t write it’.”

Attention to detail

In an effort to clarify the various sanctions and protect the market from penalties, the Lloyd’s Market Association’s marine committees (Joint Hull, Joint War and Joint Cargo) have introduced a sanctions limitation and exclusion clause.

The final wording of the clause may appear straightforward, but it was not an easy task, says Miller marine broker Stephen Finch. “This clause had to deny the very existence of insurance, rather than simply exclude cover, in order to effectively comply with the sanction legislation relating to Iran.”

And simply applying a sanction clause to a policy is not enough, explains Finch: “A certain level of due diligence is required of insurers and brokers, and indeed the assured themselves, to ensure they’re not doing anything to encourage or provide cover on a sanctionable activity or sanctioned individual.”

Under the EU regulation, insurers and reinsurers can make use of a due diligence defence if they fall foul of the sanctions without their knowledge. The US sanctions do not recognise this defence, however.

There is also a circumvention provision, which bans insurance firms from even looking at ways of getting around the sanctions.

The use of sanctions exclusion clauses may not be enough to protect marine (re)insurers and P&I clubs from breaches.

Furthermore, the sanctions have clogged up the market, causing hesitation, non-renewals and costly delays as insurers wade through regulation.

“The current legislation makes transacting business extremely complicated at times, and uses up an appreciable amount of market resource trying to ensure all parties are doing the right thing,” says Finch.

He points out that all this extra attention to complex detail has to be paid for. “There is an ever-ballooning compliance culture within the industry, which has the effect of loading costs on to each of the individual parties,” he says. “This will inevitably compress profit margins or be compensated for by passing on costs.”

This will leave insurers and their clients to pick up the tab for government’s enthusiasm for sanctions. IT

Timeline of Iran sanctions

12 October 2009 The Financial Restrictions (Iran) Order 2009 comes into force in the UK, freezing all business ties with Iran shipping company IRISL under the Counter Terrorism Act.

9 June 2010 The UN Security Council imposes additional sanctions on Iran by adopting resolution 1929 (2010), which expands an arms embargo and tightens restrictions on financial and shipping enterprises related to “proliferation-sensitive activities”.

1 July 2010 The US Comprehensive Iran Sanctions, Accountability & Divestment Act 2010 comes into force and is targeted at Iran’s petroleum products. It amends and extends the Iran Sanctions Act of 1996.

29 July 2010 Lloyd’s Market Association introduces a sanction limitation and exclusion clause for use by underwriters on a case-by-case basis.

27 October 2010 EU Regulation No 961/2010 comes into force detailing restrictive measures against Iran.

11 December 2010 The Iran (European Union Financial Sanctions) Regulations (SI 2010/2937) come into force, making certain prohibitions in the regulation criminal offences in the UK.