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Reinsurers need to revisit their internal compliance procedures due to new U.S. sanctions aimed at companies doing business with Iran.
The Iran Freedom and Counter-Proliferation Act of 2012, which President Obama signed in January and became effective July 1, strengthens existing sanctions and expressly prohibits any financial firm that does business in the U.S. from providing underwriting services or insurance or reinsurance for activities connected to Iran's energy, shipping and shipbuilding sectors.
The IFCA sanctions are meant to apply to companies no matter where they are domiciled, and the range of potential penalties for companies found to be in violation of the sanctions are broad, including being banned from conducting business in the U.S.
Enactment of the expanded sanctions prompted New York's Department of Financial Services to send a letter to 20 non-U.S. reinsurers in June, asking if they had issued insurance to entities tied to Iran.
In a copy of the letter obtained by Business Insurance, the New York officials asked the reinsurers to supply a variety of information about their units and affiliates as well as procedures the companies have in place to ensure compliance with the Iran sanctions. Moreover, the letter calls into question whether the dedicated sanction exclusion clauses reinsurers have long used to ensure compliance are now sufficient.
“While we understand that insurance agreements may include sanctions clauses that limit an insurer's or reinsurer's obligation to pay claims that violate any applicable sanctions regime, we are concerned as to whether these clauses have or would ever be used,” according to the letter. “Moreover, we are concerned that sanctions clauses do not protect against the risk that insuring a sanctionable transaction, whether or not a claim is ever made, may be found to violate the IFCPA.”
Insurers to which the letter was sent include Swiss Re, Lloyd's of London and Hannover Re.
Given this added level of scrutiny, reinsurers need to rethink their sanction compliance efforts, said Geoffrey Etherington, a partner in the New York office of Edwards Wildman Palmer L.L.P.
“It's a good time to bring in your underwriters and refresh their training about sanctions,” Mr. Etherington said. “You may also want to put in place procedures that kick transactions that involve Iran or Iranian nationals over to somebody in compliance for additional review.”
Documentation is key for reinsurers. “Having a policy is not enough,” Mr. Etherington said. “You have to establish that it has been implemented and complied with.”
Mike Zolandz, Washington-based partner in the public policy and regulation practice for law firm Dentons U.S. L.L.P., said many reinsurers began working on the sanctions-related issues before the new U.S. law took effect.
“There has been substantial compliance efforts under way for some time now to try to improve underwriting transparency, manage internal workflows and get better access to information earlier to meet the obligations of the new law,” Mr. Zolandz said.
Another consequence of the new law and New York's questions are rekindling debate about the shifting role of state and federal insurance regulators, with some reinsurance industry executives suggesting that New York state officials encroached on the purview of the U.S. Department of the Treasury's Office of Foreign Assets Control, which monitors sanctions and advises reinsurers to use dedicated sanction exclusion clauses in the guidance it provides on its website.
New York Superintendent of Financial Services Benjamin Lawsky can argue that because the sanctions could theoretically hamper a reinsurer's ability to pay an insurer and thereby harm policyholders, the extra scrutiny is justified, Mr. Etherington said.
“There has been a lot of angst among the reinsurers that got letters, but I don't think that's it's completely outside the pale for the superintendent, even though he's not a federal regulator, to do this,” Mr. Etherington said. “He does have a legitimate basis for asking for information due to the concern that reinsurers ... may find themselves subject to sanctions.”
“It's a continuation of New York's Department of Financial Services being a very vigilant regulator,” said Howard Mills, New York-based director and chief adviser of the insurance industry group at Deloitte L.L.P and former superintendent of the New York State Insurance Department. Prudential regulation may be an area of inquiry for the new Federal Insurance Office, he said.
“This might be something that FIO would look at,” Mr. Mills said. “This is evolving and we don't know how it will wind up yet.”