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London Market’s risk appetite for Iran business weighed down by remaining US sanctions

Posted on: 14 March 2016

By Chris Hill, Partner, and Wynne Lawrence, Associate, Clyde & Co LLP

New research by Clyde & Co reveals that, despite the lifting of certain EU and US sanctions, the remaining US sanctions are negatively impacting the London market’s risk appetite for Iranian business.

The survey found that the continuing US primary sanctions are weighing heavily on the risk appetite of insurance professionals in the London market considering Iran-related business opportunities.

Implementation Day

On 16 January 2016, the vast majority of the EU sanctions against Iran were lifted as well as most of the US “secondary sanctions” that target the conduct of non-US persons. This included removing the restrictions on the provision of underwriting services, insurance or reinsurance.

US “primary sanctions” – sanctions targeting US persons (both individuals and corporate entities) – remain in place subject to two new licenses. This means that US persons are still prohibited from engaging in virtually any trade with Iran.

One of the new licenses authorises UK-based subsidiaries of US insurance groups to write Iran-related business, but subject to a strict set of criteria. As such, with some careful navigation, there is a basis upon which UK-based subsidiaries of US insurance groups could potentially write Iran-related business.

Clyde & Co Survey

On 4 February 2016, Clyde & Co hosted an event at its London office for insurers, reinsurers and brokers.

Talks were given by the UK Government’s Department of Business, Innovation and Skills, Lloyd’s of London, KPMG and Clyde & Co UK (Chris Hill/Nigel Brook), US (Doug Maag) and Middle East (Patrick Murphy).

Clyde & Co surveyed attendees regarding the lifting of US/EU sanctions. Of the 52 respondents, the results were as follows:

85% of respondents said that the remaining US sanctions continue to negatively impact their risk appetite for Iran-related business;
67% said their risk appetite for Iran-related business had increased in light of the easing of sanctions although 25% said their risk appetite remained unchanged by Implementation Day; and
63% of respondents said they had operations based in the US.

What Do The Results of the Survey Tell Us?

It seems clear from these results that, whilst the majority of professionals within the insurance market are looking at opportunities arising from the easing of Iran-related sanctions, the remaining US primary sanctions are having a negative impact on insurers’ risk appetite for such business.

Interestingly, it appears that even London-based insurers with no operations in the US remain concerned about the remaining US sanctions.

Why Do Remaining US Sanctions Concern London Insurers?

There are a number of reasons – monetary, financial, risk-based and compliance-related – which might explain why the persistence of US primary sanctions continues to concern the majority of London-based insurance professionals:

US Dollar Transactions: The US dollar is widely used in global insurance contracts written in the London market. US dollar transactions must be cleared through the US banking system and primary sanctions continue to apply to US banks and dollar transactions. This is a major hurdle for insurers and insureds who prefer to conduct their business in US dollars.

European Banks: An insurer looking to insure Iran-related business will want to receive premium for doing so. Despite the lifting of sanctions, European tier-one banks have thus far remained reluctant to engage in any Iranian business which means there are difficulties receiving premium for any cover provided.

US Reinsurance: US-based reinsurers, as US persons, remain subject to primary sanctions and are unable to receive premium or pay claims in respect of any Iran-related business. If a London based insurer is unable to call on its US reinsurer when faced with an Iran-related claim it will have to pay the whole claim.  Insurers with US-based reinsurers are understandably looking at whether they wish to carry the risk of any large Iranian losses net.

Onerous Compliance: EU and US sanctions remain in place in relation to certain listed Iranian entities, such as, for example, the Iranian Revolutionary Guard Corp which is heavily involved in the Iranian economy.  Due to a lack of readily available information, it remains difficult for companies to attain the desired level of comfort that they are not dealing with a listed entity.

Risk of “Snapback”: Insurers are concerned about the possible reinstatement of sanctions, also known as “snapback”. This is particularly acute in relation to any longer term insurance contracts.  In addition, the US sanctions were eased under Presidential waiver and there is a possibility that the new US President in 2017 may not agree with the current administration’s policy towards Iran.

Looking Ahead

The international community’s rapprochement with Iran is gradual and tentative and the relief provided on Implementation Day is still in its infancy. It is entirely understandable that, whilst there is interest in the Iranian market, there is an initial reluctance to take full advantage of the new opportunities open to international re/insurers.

After such long-standing and tight restrictions on trade with Iran, it may take some time for international insurers and their bankers to understand the contours of the new sanctions landscape and to ultimately reach a landing on whether the rewards of doing business in Iran are worth the risks.

If you have any questions regarding how the changes following Implementation Day affect your business specifically, please contact a member of our sanctions team or your usual contact at Clyde & Co.

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