Iran: More opportunities ahead

An agreement has been reached between the International Group of P&I Clubs and the US authorities which will allow the shipping and trading industries to obtain more adequate insurance cover for Iranian related trades, and engage more comfortably in dealings in Iran.

International Group Coverage difficulties

The continuing application of US Primary Sanctions, which prohibit (a) US reinsurers from providing coverage in relation to any liability connected to Iran; and (b) US banks from dealing with Iran related transactions, have remained the largest obstacles for those in the shipping and trading industries wishing to take advantage of the opportunities in Iran. P&I insurance cover, which is required by all ship-owners, has been significantly limited by the US Primary Sanctions. The International Group of P&I Clubs is heavily reinsured by US reinsurers at Group GXL and Hydra levels for liabilities over the amount of USD 80million.

Such reinsurance cover is unreachable for liabilities related to Iran due to the US Primary Sanctions. A significant shortfall therefore exists in P&I cover from the International Group for incidents related to Iran.The International Group has been engaging in discussions with the US authorities to achieve a solution to this deficit, by requesting the granting of formal licenses allowing US reinsurers to participate in the International Group’s reinsurance programmes. The International Group maintains the position that it is in the policy interests of the US authorities to allow US reinsurers to participate in the Group and Hydra reinsurance programmes in order to ensure the availability of full, global P&I coverage for ship-owners.

Short term solution: fall back coverage

The long term solution will take time to be discussed, agreed and entered into. In the meantime, whilst discussions are ongoing in the background, an interim solution in the form of a “fall back cover” programme has now been given the green light by the US authorities.

The fall back programme permits non-US reinsurers to provide coverage for a portion of those liabilities which US reinsurers are currently prohibited from providing. This will include liabilities whether or not under approved certificates or guarantees. The programme will allow annual indemnity cover subject to a cover limit of Euros 70 million in respect of any one event, and in the annual aggregate, subject to one full reinstatement. It is thought that it will provide an additional coverage of up to USD500 million for Iran related claims.

Ongoing concerns to keep in mind

Whilst the fall back programme serves as an interim measure, a number of concerns remain:

·        The cover provides only a fraction of the cover that is currently missing from US reinsurers. A risk exists of non-coverage for major incidents connected to Iran, the liability for which may well fall to the ship-owner.

·        Even where coverage is in place and is sufficient, obtaining payments for Iranian related liabilities will be more complicated and lengthy than a non-Iranian claim. In particular, dollar payments will not be permitted and heightened due diligence will be required by the banks who may also carry out intricate investigations of the transactions to ensure that they themselves are in compliance with sanctions.

·        The risk of coverage limitations and banking complications should be recognised and taken into account by owners and traders when considering Iranian trades, and an open line of communication should always be kept with the Clubs and banks in relation to Iranian trades.

The fall back cover will not act as a long term solution, but it will provide an added layer of comfort to ship-owners and traders willing to take the risks of entering into Iran and take advantage of the available opportunities. As a consequence, we would expect that trade with Iran will be opened up and facilitated by the US authorities move, which marks a further step in the process of Iran re-entering the international market.

Commentary by Rovine Chandrasekera and Joanne Lewis, Stephenson Harwood