What do the sanction talks mean for the industry, and is Russia next?
Iran has been crippled by rounds of sanctions that left one of the Gulf’s potential economic powerhouses in a critical situation.
The sanctions have caused the Iranian rial to lose two-thirds of its value against the US dollar, and inflation of more than 40% has hurt the populace.
But the sanctions also affect many insurers and reinsurers, particularly those covering Iran’s lucrative energy sector.
But now a group of countries known as P5+1 is in talks with Iran to ease most of the sanctions against Iran in exchange for limits on Iran’s nuclear programme (see box below for more information).
On the surface, this seems like good news for Iran and (re)insurers alike, but how excited should they be? The short answer is ‘fairly excited, but with conditions attached’.
Goldberg Segalla partner Clive O’Connell says: “I think it is positive news, but it is not seismic. It is not something that will get people jumping up and down in the aisles.”
O’Connell explains that the current talks only apply to the sanctions against Iran’s nuclear programme, not the other set of sanctions about the country’s human rights.
This means that companies wanting to do business in the region or with Iran specifically will still need to check that they are not breaching sanctions, and this will be a drain on money and staff time.
“So it doesn’t ease the procedures that one has to go through, and in any case Iran is only one of a number of countries which is targeted for sanctions,” O’Connell adds. “So the process will still be there and will need to be rigorously enforced.”
ABOUT THE SANCTIONS EASING
The P5+1 countries are the five permanent members of the United Nations Security Council – China, France, Russia, the United Kingdom and the United States – plus Germany.
The sanctions talks are known as the Lausanne deal, after the location in Switzerland where negotiations are being held.
The US sanctions have proved to be the most damaging, with increasing sanctions since 1979 hitting the country’s economy. These sanctions ban almost all trade with the country except goods for the benefit of the people, such as medical supplies.
Iran is most hurt by the US trade ban on oil exports, but sanctions also affect banking and insurance transactions with the country.
Additionally, there are still sanctions against Iran which are unaffected by the Lausanne deal and which will need to be lifted separately.
These include sanctions from Japan and South Korea, as well as sanctions brought by individual US states.
Despite this, any potential sanctions easing of any kind is good news for insurers.
“The other side is that yes, it’s good, because there is more business that one can do,” says O’Connell.
While many insurers complied with the Iranian sanctions, others did not. European insurers, for example, were particularly rigorous with complying with the sanctions due to the region’s ties with the US and prominent position in the UN.
If sanctions are lifted then insurers in these compliant countries can once again compete. But they should be prepared for stiff rivalry.
“The insurers that stepped in will be fighting to maintain their position, so it might not be as dramatic a gain as the loss was when sanctions were imposed,” O’Connell says.
On the reinsurance side, some believe that reinsurers should be cautious about Iranian sanctions easing. Mayer Brown insurance & reinsurance associate Graham Gowland says:
“In the short term, reinsurers may continue to take a cautious approach regarding participation in risks with an Iranian nexus,” he says. “It is important to note that only the framework of an agreement has been concluded; the deadline for a formal agreement to be finalised is 30 June.
“When or if the details of a formal agreement are agreed, reinsurers will be in a better position to formulate policy with regard to Iranian risks.
“However, political opposition to the deal in the US congress, and the threat that any final deal could be rescinded by an incoming president, may mean that, even in the medium term, reinsurers will continue to take a cautious approach regarding Iranian risks.”
So the Lausanne deal talks are good news for (re)insurers and the Iranian people, even if that optimism is slightly muted.
But could easing Iranian sanctions be just the tip of the iceberg? Insurers and reinsurers are still affected by sanctions on other countries, most notably Russia. If the Lausanne deal succeeds, many in the industry will hope that the west’s attention then shifts north and that Russia is next in line for potential sanctions easing.