P&I Clubs Create "Fall-Back" Reinsurance For Iranian Claims

File image courtesy NIOC

By MarEx 2016-03-21 21:12:58

The International Group of P&I Clubs has announced that it has reached a compromise with the U.S. Treasury's Office of Foreign Asset Control for the provision of reinsurance for shipowners for liabilities involving Iranian interests, and has gained approval for an interim "fall-back" reinsurance coverage program for its members. 

Reinsurance for Iranian seaborne trade has been a persistent issue for the sale of the nation's oil on the world market. Since the United States and Europe lifted nuclear sanctions on Tehran earlier this year, trade volumes have increased - but oil has lagged behind, as preexisting sanctions unrelated to nuclear activity are still on the books, including a provision banning American reinsurers from covering Iran-related claims. 

The International Group of P&I Clubs maintains reinsurance risk pools for large losses. These pools, including the Group GXL program for claims above $80 million, involve the participation of the U.S.-domiciled reinsurers the American Club; GXL's operations also have a U.S. presence. Given the involvement of an American entity in the program, continued U.S. primary sanctions raise questions about the liabilities for the other twelve member clubs of the International Group over GXL claims involving Iranian assets or cargoes, as the sanctions forbid the American Club’s participation in such claims. 

The International Group has asked OFAC for a formal license to let the American Club participate in GXL's pooled coverage, including Iran-related claims, but OFAC remains concerned. The Group expects that a license won’t be issued for some time; it intends to review the continued participation of American reinsurers in GXL, in light of ongoing discussion with OFAC.

But in the interim, the Group says that has created and put in place a workaround "fall-back" insurance program, with OFAC's approval, to provide reinsurance in the event that losses can't be recovered under existing programs (in the event of inability to pay by American reinsurers under primary sanctions).

The Group warns that the fall-back program is intended to be a temporary solution, though, and will not be as fully comprehensive as GXL. "Because of the cover limit . . . there is a risk that the cover could be exhausted by several very significant Iran-related liability claims, or an aggregation of smaller claims up to the overall current policy limit of €140 million (2x €70 million). Consequently, the cover is not a “like for like” replacement of the cover currently available under the Group GXL and Hydra reinsurance programmes,” the Group said.

The Group aims to have a permanent solution in place for 2017 at the latest. 

Japan and India circumvented the absence of GXL coverage for Iranian oil shipments during the sanctions era by setting up government-backed insurance programs. The ending of the Japanese program has created uncertainty and difficulty for Japanese traders in purchasing crude from the National Iranian Oil Company.