The Intelligent Quarterly from the publishers of The Insurance Insider

Summer 2018

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The Persian paradox

Bernard Goyder

Iran presents a conundrum for global insurers. Since January 2016 EU financial sanctions have been lifted on the Islamic Republic, but carriers have held back, tentatively waiting for others to jump into a market hungry for international insurance and reinsurance capacity.

Iranian risks used to be a common sight on underwriters' desks in the London market, but demand has dropped since the United Nations introduced sweeping financial sanctions a decade ago.

The sanctions crippled an Iranian economy cut off from capital by US trade restrictions - a longstanding feature of the tense relationship between Tehran and Washington DC since the 1979 hostage crisis.

Now specialty insurers and reinsurers are exploring Iran's potential as a growth market.

To write Iranian business, carriers must navigate a Kaftkaesque web of contradictory rules, sanctions and political pressures.

The prize is a rapidly growing insurance market of 80 million people, living above the world's fourth largest oil reserves.

Brokering Iran
United Insurance Brokers (UIB) has been placing Iranian risks since the 1980s.

As Ralph Kabban, the managing director of UIB in Dubai, says: "Before the sanctions came in we did their entire oil and gas output."

"We've been there through all its political upheaval," Kabban continues. "We've seen it right through. Because of our history, clients in Iran have a sense of comfort dealing with us."

UIB has a representative in Tehran. The company works with Iranian insurers, reinsurers and brokers to place risks into the global market.

Kabban has been impressed by the quality of the risks available in the Iranian market, compared to the often ropey private sector energy assets in other countries. "Many of the energy risks are government-owned - as state assets they are well maintained, well taken care of," he says.

"Any London broker can do it," enthuses Kabban.

Ed is another intermediary putting Iranian risks into the market.

The wholesale broker, formerly known as Cooper Gay, has built a facility in the Lloyd's market, led by Munich Re Syndicate 457.

The arrangement gives facultative insurance to upstream energy risks, power plants, mines, third party liability, telecoms and even satellites.

Led by Ed's Iran country manager, Khosro Azad, the broker has lined up EUR1bn of upstream energy capacity, with up to EUR600mn available for other lines. According to Ed, Iranian energy sector insurance buyers have responded enthusiastically, with policies covering the South Pars gas field now placed in the London market.

A sophisticated market
According to data from the Insurance Information Institute, the Iranian market wrote over $7bn in annual gross written premiums in 2015.

Cut off from Western insurance capital, Iran is reliant on its domestic market to cover complex assets, from ships and aircraft to oil installations and infrastructure construction.

"The Iranian market has become quite self-sufficient," Kabban notes.

Fast growth in personal lines is also set to push up demand for treaty coverage.

As Abdolnaser Hemmati, the head of Iran's insurance regulator Bimeh Markazi Iran, told Business Tribune in June, Iran's insurance penetration rate grew by 0.5 percent in the year to 20 March 2017, to reach 2.2 percent. That's higher than Greece, which had 2.0 percent insurance penetration in 2015.

Patrick Murphy, a partner at Clyde & Co specialising in shipping and sanctions, says: "There is actually quite a sizable local insurance market." "Anecdotally, most of it is reinsured in the domestic market. Bimeh Iran [the state-run insurance company] will write it," says the lawyer.

"It's the largest Islamic insurance market in the world," Murphy adds.

According to the Dubai Center for Islamic Banking and Finance, Iran makes up more than two-fifths of global sharia-compliant insurance premiums. To reinsure this booming market, Iranian carriers look east.

Three sources told Insider Quarterly that Chinese and Japanese reinsurers are involved in writing Iranian treaty business.

And an underwriter working at an Iranian reinsurer in the Arab world also told IQ that plenty of Iranian treaty reinsurance was being funnelled to India.

In April, Bimeh Markazi Iran president Hemmati met with Alice Vaidyan, the CEO of General Insurance Corporation of India (GIC Re), in talks aimed at tightening existing ties. The discussions in Bangkok took place on the fringes of the Asian Reinsurance Corporation board, on which Hemmati sits.

Mehr News Agency reported that Hemmati offered Vaidyan Iranian retrocession capacity, in a sign that Iran will use its state-run insurance industry to strike deals with other emerging market powers.

Receding sanctions
After years of talks involving the US, the UK, Germany, France, Russia and China, Iran signed a deal limiting its nuclear ambitions that led to most sanctions being lifted in January 2016.

"When the EU sanctions were released we saw a flurry of queries," says Peter Hodgins, a partner at Clyde & Co in Dubai. "Things have quietened down since," he adds. "Frankly, everything ground to a halt very quickly."

American sanctions still ban US entities from engaging in Iran-related trade, making it impossible for US banks to clear Iranian transactions.

And banks have maintained de facto sanctions against Iran by refusing to touch dollars that have been anywhere near Iranian counterparties.

For banks, it is a case of 'once bitten, twice terrified' at the prospect of breaching sanctions. BNP Paribas, for instance, was fined EUR8.9bn by the US Justice Department in 2014 over sanctions violations. And in 2012, UK banks HSBC and Standard Chartered also felt the wrath of the US and coughed up heavy fines.

"As long as the US sanctions remain, the risks outweigh the benefits," comments Hodgins.

A reinsurance underwriter says: "It depends on who your banking partner is. I understand that Lloyd's and Xchanging are no longer cooperating, you have to do a direct payment."

"But if you've got a compliant bank, it can be done," the source notes.

The standard system for international cash transfers, Swift, does not work in Iran.

As Hodgins notes, although Iranian premiums can be handled in euros, in practice many banks have made it a condition of doing business that transacting with Iran is avoided.

"Everything has to be totally ring-fenced" says one political risk broker, "a lot of people are still blocked by their banks".

Export credit agencies
Government providers of export finance and trade credit insurance, known as export credit agencies (ECAs), are keen to fill in the gap left by the private sector in Iran. Swedish and Swiss ECAs are said to be active providers of credit insurance.

As far as the UK government's lending and trade credit insurance arm, UK Export Finance (UKEF), is concerned, things have been quiet. A source says that the banks' cautious attitude means that UKEF has yet to back British exports to Iran since EU sanctions were lifted, but that the agency is "ready to provide financing support as financing channels open up".

Part of the Persian paradox is that while one part of the UK Treasury, UKEF, is trying to promote exports to Iran, another group of mandarins in a different part of the same building is mandated with implementing existing sanctions on the country.

Individuals and businesses linked to the Islamic Revolutionary Guard Corp (IRGC), a branch of Iran's armed forces tasked with protecting the country's Islamic system, are subject to EU banning orders, as are all weapons exports.

There are 276 mentions of "Iran" on the UK sanctions list - including many individuals and companies connected to the IRGC.

Doing insurance business in Iran without attracting the ire of the US and its regional allies such as Saudi Arabia and the United Arab Emirates requires a lot of due diligence. As Kabban notes: "We have a stringent compliance regime."

The UAE has become the main entrepôt for Iranian reinsurers, despite restrictions.

"Officially, the UAE cannot transact with Iranian insurers," says a legal source. "However, there are ways round that that Iranians have. Dual nationality Iranians tend to operate in the UAE."

The worst nightmare for corporates is getting on the wrong side of the US. The US Treasury Department's Office of Foreign Asset Control (OFAC) operates in Dubai, where it works closely with the local authorities to ensure US sanctions are complied with. The legal source says no one wants a knock on the door from OFAC. "It's a very apt name for that agency," he jokes.

Parallel state
"It is very important to keep in mind that Iran has at least two parallel foreign policies going on at once," explains Laura James, a senior Middle East analyst at the advisory consultancy Oxford Analytica.

Iran's reformist president, Hassan Rouhani, was re-elected with over 57 percent of the vote in May. Rouhani has been the leading the effort to bring Iran back into the world economy by makin g concessions on nuclear weapons development.

But in his way stands not just US president Donald Trump, who has described the Iran pact as a "bad deal", but also more conservative forces inside Iran.

"There's the Rouhani nuclear deal foreign policy, and then there is the Islamic Revolutionary Guard Corp foreign policy. The IRGC gets to decide which countries Iran intervenes in and helps militias and sends arms to," says James.

Iran exercises a muscular foreign policy in the Middle East. The country is allied to the Iraqi government of Prime Minister Haider al-Abadi and President Bashir Al Assad in Syria. In Lebanon, Iran has close military ties with Hezbollah which, as well as being a heavily armed militia, sits in the country's ruling coalition government.

"The US still classes them as a state sponsor of terror," says Clyde & Co's Murphy.

And James argues that Rouhani will be unable to remove sanctions totally.

"Plan A was: agree the nuclear deal with the US and world powers, get sanctions fully lifted, get foreign investment flooding in, and then you don't have to worry about more difficult reforms to banking and pensions and the insurance industry - that's not so important, because you've got the foreign investment influx.

"He's not going to get plan A to work," she says.

US lawmakers have been unwilling to give full sanctions relief. While Trump has kept the nuclear deal in place, the unpredictable president has a tendency to execute volte-faces on important policy issues.

James believes that companies are still going to hang back from investing in Iran, "because they are worried about what the US is planning to do... [Rouhani is] going to have to focus on plan B, with Asian money coming in and some European money".

For the insurance industry, the difficulties of attracting investment to Iran mean that the bulk of Iranian risks being covered by international (re)insurers are likely to remain domestic for some time to come.

Foreign investments
Nonetheless, the pipeline for insurable risks exposed to Iran is looking healthy. In July, Total signed a $4.8bn deal with Iran giving the French oil giant a 50.1 percent stake in the world's largest gas field, South Pars 11.

The French are keen to do business with Iran. Kabban notes: "French reinsurers are the most ahead. [They] have a long history of dealing with the Iranians."

Shell signed an agreement in December 2016 to develop Iranian oil and gas fields, while the Italian oil company Eni signed a similar contract in January.

An underwriting source tells IQ: "There was this early promise of gold at the end of the rainbow. There's certainly business coming through, [but] there should be more, particularly in terms of some of the development projects, and particularly with the likes of oil majors like Total back in the region. There will be some more construction activity coming down the line."

Even Boeing has received an exemption from OFAC to sell planes to Iranian airlines. The aircraft manufacturer finalised a credit insurance facility with Marsh, but it remains to be seen whether the broker will allow the loans financing Boeing's exports to Iran - which are controversial in the US - to be insured through its facility.

Bird without wings
Iran presents an immense challenge to (re)insurers. The legal and financial complexities of insuring Iranian risks are a compliance department's nightmare and a City law firm's dream.

For more adventurous brokers and carriers, the rewards are clear. A rapidly growing insurance market, with a growing appetite for treaty capacity, and an oil industry that requires specialty insurance solutions can provide global carriers with a welcome injection of premium.

But working to build understanding and respect for Iran and Iranians must be a prerequisite for doing business in the country.

As the medieval Persian poet Saadi Shirazi said: "A traveller without knowledge is a bird without wings."

This article was published as part of issue Autumn 2017

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