Iran Trading – P&I cover update

Marine Insurance, P and I Clubs, Sanctions — By on March 22, 2016 at 3:02 PM

Steamship P&I LondonFollowing from the Steamship Insurance Management Services Limited

London Circular: L.273

Further to Club Circular L.272 concerning the lifting of EU and US sanctions under the JCPOA, the Club has published a follow-up circular addressing P&I cover issues in connection with trade to/from Iran, and outlining the terms of a fall-back reinsurance cover arranged by the Group Clubs to protect members against possible shortfalls in cover. Please see below link to Club Circular L.273 which is now available on the Steamship Mutual website.

Iran trading – P&I cover update

Introduction
Members are referred to Club Circular L.272 dated February 2016 concerning Iran
sanctions. This Circular is intended to update members on the latest developments in
relation to the interim and longer-term solutions to the reinsurance recovery shortfall risk
under the Group General Excess Loss reinsurance programme and Hydra retrocession
programme.

1. Discussions with the US Administration.

Since the formal implementation on 16 January 2016 of the Joint Comprehensive Plan of
Action (JCPOA) agreed between the P5+1 countries and Iran, the Group has been
continuing its engagement with the relevant departments within the US government (the
State Department and the Treasury Department’s Office of Foreign Assets Control (OFAC))
to discuss the P&I insurance ramifications of the implementation of the JCPOA.

The implementation of the JCPOA in January 2016 resulted in the lifting of:
(a) The nuclear-related EU sanctions which had impacted Iran trade and the insurance
thereof (with the exception of some continuing prohibited trades and trading by, and
with, SDNs), and
(b) the nuclear-related US secondary sanctions, which impacted non-US person
insurers/reinsurers.

However, the US administration did not undertake under the JCPOA to lift, nor has it
lifted, the primary US sanctions which, amongst other things, prohibit the provision of
insurance/reinsurance cover by US-domiciled re/-insurers.

2. Insurance cover solutions

In its discussions with the US Administration, the Group has maintained its primary
contention that it is in the policy interests of the US government that US-domiciled
reinsurers should be licenced to participate on the Group GXL and Hydra reinsurance
programmes. Over the next several months, the Group will be continuing its engagement
with the Administration on this issue with the objective of securing a formal license to allow
such participation. Such a license will be the most effective long-term solution to the
problem of ensuring the availability of full, global, P&I coverage for shipowners. The
proposed licensing solution does, however, raise fundamental policy questions for the US
Administration and, as a result, licensing is unlikely to offer a “quick fix” to clubs’ short-term
abilities to offer adequate, sustainable and effective insurance cover for their members in
relation to liabilities involving Iranian interests howsoever, or wheresoever, these might be
incurred. Depending on the outcome of those discussions, the Group will, for the next policy
year, also review the on-going participation of US-domiciled reinsurers in the Group and
Hydra reinsurance arrangements.

In the meantime, and as previously advised to members, in an effort to find an interim
solution to facilitate a resumption of lawful trading with Iran, the Group has, with the
assistance of its brokers, been investigating the possibility of placing a “fall-back”
reinsurance programme. This programme is designed to respond to reinsurance recovery
shortfalls resulting from the inability of US-domiciled reinsurers on the Group GXL and
Hydra reinsurance programmes to make payments due to the continuing application of US
primary sanctions. Subscription to such a programme would necessarily be confined to nonUS
reinsurers. The major concern of those reinsurers which have been approached has
been 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
programme. Following further engagement by the Group’s brokers, the “fall-back”
programme has now been put in place.

3. “Fall-back” cover – key features

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.

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 exposure to possible US reinsurer shortfall involving liabilities arising from a
single claim/incident 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
possible US reinsurer shortfall involving a single event certified (full CLC, WRC and TOPIA)
exposure such as in respect of a VLCC. In the absence of exhaustion through a single
claim/incident, the cover would be available to respond to a series of smaller
claims/incidents 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 worstcase
basis the Hydra AAD had already been fully exhausted). The Group’s brokers believe
that capacity may become available further to increase the fall back reinsurance cover and
reinstatement limits, and they will continue to investigate this possibility.

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 of re-insurance shortfall 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 as is the case for certified liabilities, but only on
the basis that the ” fall-back” cover is available/has not been exhausted.

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, in respect of non-certified liabilities, the cover is not a “like for like”
replacement of the cover currently available under the Group GXL and Hydra reinsurance
programmes.

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.

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.

All clubs in the International Group have issued a similar circular.
The Managers were, and remain in favour of the clubs agreeing a more comprehensive
pooling solution to the reinsurance failure issues in respect of non-certificated liabilities, as
is the case for certificated liabilities which are fully re-pooled under the Supplementary
Pooling Agreement. Whilst it has not proved possible to put in place such a solution at this
stage, the Managers will continue to seek agreement to do so as and when possible. In the
meantime, whilst it is not as comprehensive a solution as was hoped, inasmuch that it
does not entirely eliminate the risk of a reinsurance shortfall falling upon a Member, the
Managers are pleased that the protection under the fall-back reinsurance is in place, which
it is hoped will encourage the resumption of trade with Iran as envisaged under the terms of
the JCPOA.

Yours faithfully,
STEAMSHIP MUTUAL UNDERWRITING
ASSOCIATION LIMITED

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