Deadline Looms For EU Ban On Iran Oil Tanker Insurance

The 1 July deadline is approaching for the EU’s implementation of a ban on provision of protection and indemnity (P&I) insurance for ships carrying Iranian crude oil. This could cause a bottleneck and has the potential to stop the transport of Iranian oil. It may therefore become an effective way of further pressuring Tehran to give up its nuclear program. But the ramifications are unclear, because a number of countries importing Iranian crude are examining alternative insurance arrangements. Nevertheless, even if these alternatives are put in place, there are concerns that coverage will prove inadequate. This would heighten the financial risk for vessel operators and their insurers because it means that in the event of a third party claim there could be insufficient funding to make payments. Lobbying efforts by the UK, a major center for insurance, to push back the date, continue (MEES, 14 May). A spokesperson at the UK’s Foreign and Commonwealth Office told MEES that the EU’s Foreign Affairs Council will meet on 25 June to consider the issue.

Until it hears of any new developments, the London-based International Group of P&I Clubs (IGP&I) will proceed on the basis that the ban will go into force on 1 July, said Andrew Bardot, the group’s Chief Executive. The IGP&I’s 13 principal underwriting member clubs provide liability cover (P&I) for approximately 90% of the world’s ocean-going tonnage. “We’ve got 85 reinsurers around the world who participate in our program and our system is completely taken out by this because even the clubs which are not EU-regulated or based in the EU are party to the group’s pooling arrangements for big claims, and party to the group’s reinsurance arrangements,” Mr Bardot told MEES. Therefore, even though some countries were recently given an exemption from the US to import Iranian crude (see page 24), the forthcoming EU P&I ban is an impediment. “The scale of these risks is way beyond a single carrier. They have to be laid off into the reinsurance markets. And to find markets which are not going to be impacted in some way by the European sanctions is quite difficult,” explained Mr Bardot.

The IGP&I can provide $1bn of coverage through its system in the event that an oil spill causes pollution, and for other liabilities, such as collision and loss of life, the amount can be even greater. “If a vessel inadequately insured because of the sanctions collides with a big passenger ship, kills a lot of people and is responsible for the collision there will be a huge liability exposure but inadequate insurance to respond,” he warns. Insurance cover is not provided for the benefit of sanctions targets – in this case Iran – but for innocent third parties falling victim to maritime disasters, he stresses. The IGP&I, whose member clubs are not-for-profit mutual associations, is concerned that if there are more ships sailing without proper cover, in the event of an incident there will not be sufficient funds available for recovery. This will thus heighten financial risks for vessels navigating certain shipping lanes.

Petchem Ships Switch Cover On The Water

The EU ban on P&I for ships carrying Iranian petrochemical products went into force on 1 May. Some ships had sailed with the intention of completing their voyages before the deadline, but were still on the water when it passed. They had to make alternative arrangements, said Mr Bardot, noting that the period appeared to pass without incident. “Ship owners were talking to clubs and the advice that was given to them, which we endorse, was to make alternative insurance arrangements to cover the voyage beyond 1 May,” he noted. He expects that some ships will be caught at sea when the crude P&I ban goes into place on 1 July, due to delays on the voyage or slower than expected discharge of cargo. This could create problems for leveraged ships because their loan agreements will require a certain level of ongoing coverage. 

Ahead of the ban, a number of alternatives are being scrutinized by the biggest importers of Iranian crude – namely China, India, Japan and South Korea. Japan is seeking the green light from parliament to provide a sovereign guarantee to allow cover of up to $7.6bn for tankers carrying Iranian crude. However, it is unclear whether this is the sum total of the fund available, or if it is a per incident limit – the latter would be extremely high. India and Korea have also been contemplating sovereign schemes. China P&I Club is considering providing insurance, but this could prove difficult. While it is not an IGP&I member, the group does reinsure a considerable amount of China P&I Club’s tonnage, notes Mr Bardot. “They would not be able to rely on that so they would have to find some totally independent reinsurance structure that wasn’t dependent on EU-regulated insurance or financial markets,” he added.

Tehran itself has suggested it will offer generous terms on its crude cargoes, but would probably struggle to provide insurance and reinsurance. It would be hard to take a scheme seriously where payment of claims would prove difficult because financial sanctions would prohibit collection of the money, said Mr Bardot. Iranian banks subject to sanctions were booted off SWIFT (the Society for Worldwide Interbank Financial Telecommunication) in March this year (MEES, 19 March). This effectively cut off Iran from global transactions because SWIFT is the world’s biggest payment platform covering over 10,000 financial institutions operating in 210 countries. Shutting Iran out of SWIFT has, incidentally, also made it difficult for clubs to make payments to settle legitimate liabilities with Iranian companies or individuals. There have cases where those operating inside the IGP&I scheme have had to seek permission from the UK Treasury to make these types of payments, said Mr Bardot.

© Copyright MEES 2012.