The Iran Quagmire

As the first crude carriers are being fixed to take Iranian oil, the insurance industry is in a quagmire over the eased sanction regime. In particular it is the inability of US insurers or reinsurers to pay claims related to voyages to Iran that is causing trouble. On the hull side this is relatively easily handled by a replacing of the insurances with European insurers, however, this involves a cancel and rewrite of policies which is a quite big exercise and is therefore easier considered in connection the ordinary renewals. US backed insurers have reason to be concerned about upcoming renewals in particular with regard to their clients in the energy transportation industry, should not the falling rates were be troubling enough. The position with regard to Lloyd’s is also far from clear with underwriters reluctant to take decisions, and pointing to their compliance departments for approval. Elsewhere European insurers look hard at their reinsurance and worry about any irrecoverable amount from US reinsurers.

Above all, however, it is the International Group that is the problem. The IGA is yet to take a clear position that is of use for shipowners. The members are debating between themselves how the International Group Agreement should be applied to the current situation. It seems clear that any club who goes ahead with offering P&I to ships trading on Iran (always of course in accordance with the revised sanctions) will be liable for their retention. When it comes to the pool the general view is that this will respond, however, with the exception of the American’s Club’s participation of 3.1% which ahead of the renewal amounts to USD 2,201,000 which may end up for client’s account. Further up the programme some 17% of the Group’s reinsurance programme to USD 3 billion is placed with US reinsurers, which points to a shortfall of USD 494,400,000. From here on it gets complicated, with no clear statement coming out of the IGA: one view held is that the USD 494,400,000 is a poolable exposure which again means a shortfall (American Club) of 3.1% i.e. USD 15,326,400 as a potential exposure for client’s account. Altogether therefore the exposure for clients could be as high as USD 17,500,000 million which most owners would be more than reluctant to face. Eve a more probable worst case scenario of USD 1 billion, points to a possible irrecoverable amount of close to USD 5 million.

An then of course there is the matter of who the client is liable to: if the third party (another ship or say jetty) is on the sanctions list then P&I will be unable to post guarantee, and the vessel end up being arrested, so risks remain high even with a solution.

Edge’s experience with the matter generally points to Hull, Interest and LOH exposures with replacement capacity being available with security in Norway both on voyage (generally for existing clients) and at renewal. On the war risk covers we have seen to date US insurers and reinsurers have significant involvement and voyage replacement is harder to get done, due to higher exposures. We have, however, available a separate war takeout capacity for owners wishing to trade Iran.