Why insurers grapple with the impact of sanctions
As part of its contribution to London International Shipping Week 2019, Lockton hosted a panel discussion moderated by P.L. Ferrari’s Stephen Hawke to discuss how economic sanctions are impacting the shipping world and how the sector is dealing with them.
Stephen Hawke (PL Ferrari), Mike Salthouse (North England P&I), Nick Busvine (Herminius), Richard Young (Beazley)
The shipping sector finds itself at the centre of the sanctions conflict as it is responsible for 90% of all the goods transported in the world, explained Alistair Rivers, Global Head of Marine at Lockton, in his opening remarks.
Sanctions are not a new tool in international politics but what has changed is that a coherent approach no longer holds between the EU, the UN and the US. Engaging in import/export trade with Iran might be legal in many countries in the world but the shipping industry faces significant pressure to abide with US sanctions policies which ban this trade, according to the panelists.
During the panel discussion “Navigating Difficult Waters―How sanctions are shaping the shipping world,” Mike Salthouse, from mutual liability insurer North of England P&I Club, said that it is becoming increasingly difficult for insurers to comply with the various global sanctions regimes because of the different policy approaches adopted by the EU and the US with regard to Iran, Cuba and Venezuela.
Ultimately, Salthouse outlined, insurers need to be mindful of US secondary sanctions which have extra territorial effect because of the dominance of the US economy and its financial system, even where those sanctions are contrary to EU law. Companies and individuals allegedly breaking sanctions can be targeted in a number of ways and, if determined to be in breach of US sanctions, may be excluded from US financial markets. Additionally, transactions linked to high risk countries such as Iran, Venezuela or Cuba may prove impossible to carry out as international banks will want to avoid participating in any transaction connected to sanctioned countries, even if they are legal. This low risk appetite in some cases can prevent insurers from paying legitimate claims, Salthouse noted.
It is perhaps not surprising that there are significant overlaps between war hotspots and countries targeted by sanctions, particularly in the Middle East, said Nick Busvine, Partner at intelligence consulting firm Herminius. Military interventions in the region have failed to deliver peace and stability. Now, Iranian sanctions are being applied to prevent nuclear proliferation. The problem comes if the sanctioned state refuses to admit its position and resorts to armed force (e.g. attacks on vessels) or other hostile acts (e.g. seizing vessels, kidnapping hostages) in response. This places the states imposing sanctions in a dilemma, assuming they do not want to resort to all out conflict.
There are enormous efforts behind the scenes to de-escalate the situation, Busvine noted. US President Donald Trump does not want war but - as the UK’s former Foreign Secretary Jeremy Hunt pointed out earlier this year - we could end up with a violent escalation by accident.
The situation is made particularly dangerous because the Islamic Revolutionary Guard Corps (IRGC) have a track record of success in the region going back years, Busvine said. In other words, they are used to winning and they have the confidence to call the bluff of the US while also seeking to drive a wedge between the US and the EU, he added.
While war exclusion zones are relatively clearly marked, the applicability of sanctions is often quite complicated and unclear for insurers, as demonstrated by the circumstances in which a number of vessels have recently been seized. The Adrian Darya 1 (former Grace 1), an Iranian flagged oil tanker, for example, was detained in Gibraltar for allegedly breaching sanctions against Syria but the US vowed to impose sanctions on any buyer of the oil as they would be breaching its Iranian sanctions regime.
The vessel seizure risk is very real and insurers are operating in an extremely difficult environment, said Richard Young, Head of Hull & War at specialist insurer Beazley. Premiums are currently not high enough to cover the risk of ship seizures. In addition, the US is pressuring insurers to monitor shipping movements on their behalf, a highly problematic expectation. While agencies like the International Maritime Organisation (IMO) recognise that in appropriate circumstances ships may turn off their automatic identification system (AIS), in doing so shipping firms are now suspected of doing this to breach sanctions undetected. Insurers have no means to verify if this is the case or not, he noted.
Insurers currently need to navigate a minefield of sanctions and fast-moving geopolitical risks and rely extensively on expert advice, Young said. Adhering to sanctions is fundamentally important but there may be times when this restricts the outcomes that a client is looking for, and sometimes a client’s interpretation of a particular sanction may differ to that of the insurer, Young said.
The effect of the EU Blocking Regulation and the sanctions regime that was reintroduced by the US following their withdrawal from the Joint Comprehensive Plan of Action (JCPOA, known commonly as the Iran nuclear deal or Iran deal), means that an insurer may be penalised for insuring a risk as well as for not insuring it, Salthouse summed up.
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