International Group announces completion of a EUR 70 million aggregate fall back cover on Iran voyages

All members of the International Group on Friday circulated below message relating to their joint purchase of an Iran fallback cover. The Group has been working since 16 January to find a solution to the lapse of reinsurance cover caused by the US administration not undertaking under the JCPOA to lift the primary US sanctions which prohibit the provision of insurance/reinsurance cover by US-domiciled reinsurers.

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A fall back program has now been purchased, however, a major concern of those reinsurers which have been approached has been a fear that participation in such a programme would be deemed by the US as unlawful “facilitation,” or a deliberate circumvention of US primary sanctions, or give rise to reputational issues. Following extensive engagement with OFAC, the Group was successful in obtaining confirmation/comfort for non-US reinsurers potentially interested in participating on such a program.

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The cover is an annual cover in respect of P & I liabilities, whether or not these arise under approved certificates or guarantees. It provides indemnity in respect of claims which would otherwise have been recoverable under the first and second layers of the Group GXL reinsurance programme, US domiciled private placement and the Hydra reinsurance programme, but for an inability to pay by US domiciled reinsurers by virtue of continuing US primary sanctions.

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Importantly, there is a cover limit of €70 million in respect of any one event, and in the annual aggregate, with one full reinstatement.This limit would, at current exchange rates, accommodate a single vessel loss scenario based on a combined single event liability of US $500 million within the first layer of the GXL, the US domiciled private placement and the Hydra reinsurance. It would also be sufficient to respond to a single event certified (full CLC,WRC and TOPIA) exposure. In the absence of exhaustion through a single vessel loss scenario, the cover would be available to respond to a series of smaller loss events up to the €70 million aggregate limit.The largest historical loss to the GXL and Hydra reinsurance programmes involving Iran- related liabilities could have produced an exposure to the fall-back cover of up to approximately €20 million (assuming on a worst-case basis the Hydra AAD had already been fully exhausted).The Group’s brokers believe that capacity may become available further to increase the cover and reinstatement limits, and they will continue to investigate this possibility.

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A key feature of the fall-back cover is that it not only provides reinsurance protection for a failure in reinsurance in relation to certified liabilities (arising under approved certificates e.g. Blue Cards and guarantees) which currently are poolable between clubs without reinsurance under the Group Supplemental Pooling Agreement, but it also provides reinsurance protection in respect of other non-certified liabilities (e.g. collision, damage to property, etc.) in respect of which the risk currently rests with members. In respect of such liabilities, as part of the “fall-back” solution, it has been agreed to pool these, to the full extent of Club cover, but only on the basis that the ” fall-back” cover is available/has not been exhausted.

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However, because of the cover limit, and the single reinstatement terms (in contrast to the GXL programme which has unlimited reinstatements), 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.

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The clubs have agreed to review this arrangement should it become apparent that the cover may be exhausted, or should it become unavailable for some other reason, for example the imposition of new sanctions or prohibitions.The fall-back cover itself contains a sanctions clause which could be engaged in the event of future sanctions or prohibitions constraining the subscribing reinsurers.

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The Group will continue to explore possibilities for increasing the limit/re-instatement options for the cover to maximise the protection available for members.This fall-back solution is, however, only a temporary one, due principally to the cover and reinstatement limits, even if they are expanded. Efforts and engagement will continue with the US administration with a view to ensuring that a permanent long-term solution is in place for 2017 at the latest.

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