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Wednesday, March 21, 2012

EU ban on Iran - India feels the pinch at Insurance front

Quite often it would be asked why an international event should affect the price of brinjals in local market ? – but repercussions are indeed felt whenever tumultuous events occur internationally !!  India like all other countries is so much dependent on crude oil – a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface – simply known as Petroleum.  Crude oil is the term for "unprocessed" oil, the stuff that comes out of the ground.

There is a powerful confederation of Nations called the  European Union; EU  along with United States has imposed sanctions against Iran over the controversies around Iranian nuclear program. These sanctions which have been described as the toughest EU sanctions imposed against any other country by European officials were last strengthened on 27 October 2010 within by the EU Council.  There is further news that  EU foreign ministers decided on 23 January 2012 to ban new contracts to import petroleum and petroleum products from Iran and to end existing contracts by 1 July 2012.  Sure, India is not part of EU but the decision by its wider ramification affects India is the long story !, and it has arisen out our industry i.e., Insurance makes it more complex and interesting to read…….

Recently,  India has asked Saudi Arabia, its largest crude oil supplier, to augment daily shipments by up to 100,000 barrels each year over the next few years to meet expanding refining capacities at home.  Saudi Arabia exported 547,236 barrels a day to India in the financial year that ended March 31, 2011, comprising nearly 17% of the South Asian nation’s total crude oil imports.  India’s plan to boost crude imports from Saudi Arabia come as Indian Oil Corp., Mangalore Refinery & Petrochemicals Ltd., Bharat Petroleum Corp., Hindustan Petroleum Corp. and Essar Oil Ltd. seek to expand their capacities as a growing economy drives demand for fuel products.

Global crude markets have been rattled with fears of supply disruptions owing to U.S. and European Union sanctions on Iran on the Islamic Republic’s nuclear program. Iran is India’s second-largest supplier after Saudi Arabia and hence our requesting more from Saudi Arabia.    Internationally with specific reference to Asian market, the new  European sanctions are impeding as they  limit coverage of Iranian oil ships by Reinsurers.

There was the disturbing news that Indian Oil Corporation had to cancel an Iran spot shipment contract with Shipping Corporation of India because of the shipper’s inability to get insurance coverage in time.  It is reported that as insurance coverage could not be in place in time, another vehicle reportedly had to be chartered.   Though Indian policies permit  continued import of crude from Iran, shipments are always insured.  The values are extremely high and individual Insurance Companies may not have the capacity to hold the risk in its entirety and hence they resort to reinsurance.

For those who are not  very conversant – Reinsurance is Insurance by Insurers extending the principle of ‘spreading the risk’.  The Insurance Company which takes the risk coverage further cedes (takes cover) from another bigger or Specialist Insurer, known as Reinsurer.  The reinsurance arrangement ensures that losses, if any, are spread far and thus increases the capacity of Individual Insurers.  There are different ways of taking reinsurance primarily divided as ‘proportionate’ and ‘non-proportionate’ basis.  Indian Companies look forward to General Insurance of India as their Reinsurer and for bigger risks do place facultative cover with International Reinsurance Companies. 

With the EU ban in place, European insurance companies are reluctant to provide indemnity for transporting crude from Iran and this position would strangulate further from 1st July 2012.   There is some news of EU diplomats  debating on exempting some insurers from a ban on dealing with Iranian oil shipments after Asian oil importers lobbied for exceptions to ensure oil deliveries, government and industry sources. The very purpose of EU ban was to isolate and economically strangulate them, but the noose is tightening elsewhere also.  The EU agreed an oil embargo on January 20 to stop members from importing Iranian oil from July. The embargo also specified a ban on EU insurers and reinsurers from indemnifying vessels carrying Iranian crude and fuel anywhere in the world.

Europe's insurers cover the majority of the world's global oil tanker fleet, and the ban impedes Iran's biggest crude buyers in Asia from importing Iranian crude.  India is not alone, higher r oil prices mean Iran is receiving a higher price for its exports, while importers such as India, China,  Japan, South Korea and other Asian Nations  face a rising fuel bill.  The Asian reinsurance market is not big enough – it is stated that in  Japan, it’s P&I Club, the country's main ship insurer and it has the capacity to bear  losses of $8mln at the most,  and compared with the probable claims in billions, a single loss could wipe the Company out of the market. Besides Insurance, the  sanctions have forced many private oil tanker companies, such as Frontline  and Maersk Tanker  to stop carrying Iranian oil on their ships. This could also eventuate further rise in price of oil. 

On the Insurance coverage front, there is some news that Shipping Corporation is in talks with domestic insurers to provide replacement cover, while the Indian government is considering offering sovereign guarantees.  The oil import is all important and there has to be some viable solution.   SCI reportedly is seeking the PSU Insurers to address the issue.  Days-wise July is long time away but the pressures are already causing deep concern to the industry.

One of the solutions could the bat of Indian oil buyers  asking Iran to bear the insurance risk for transporting its crude. National Iran Oil Corp (NIOC)  is reported to have  indicated that  it may consider the request on a case-by-case basis.  That would mean the sale is on CIF basis which would again push the costs of crude higher – another hit would be that the Indian Insurance industry would no longer earn premium from that trade.  The value, terms of sale, the restricted availability of tankers to carry crude all will have cascading effect on the prices.  Already reports suggest that  Iran’s leading tanker operator, NITC, has a total of 14 ships scheduled to load at the country’s largest crude export terminal at Kharg Island  which is more than double of its usual exports.  More exports only mean more money for the country and that is diametrically opposite to the intended ban of EU & America.

With regards – S. Sampathkumar.

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