Iran oil and the insurance factor

Two recent developments seem to have given a glimmer of hope and relief to Indian tanker owners, who were worried over the European Union ban on providing insurance to Iranian oil cargo. One, reports about the UK persuading EU to postpone by six months the insurance ban that is expected to take effect from July 1. Two, the public sector insurers' consensus to provide a $50-million cover to Indian tankers carrying Iranian crude.

While the first development gives relief to Indian shipowners in terms of more time to work out alternative insurance cover, the second brightens their chances of getting government support. The EU sanction against Iran over its nuclear programme will prevent Europe-based Protection and Indemnity (P&I) Clubs from providing cover to ships carrying Iranian cargo from July 1. P&I Clubs provide insurance cover for third-party liabilities, which include a carrier's liability to the owner of a cargo for its damage, the liability of a ship after a collision and environmental pollution.

EU sanctions

Thirteen international Groups of P&I Clubs provide either insurance or reinsurance to about 90 per cent of the world's fleet, including that of India. Tankers cannot operate without third-party insurance as claims arising out of any accident or oil spill could be huge. Ever since EU announced its sanctions against Iran in January, (which will come into effect from July 1), the Asian countries importing oil from Iran have been trying to work out alternative sources of insurance. Japan is considering a new law to insure its tankers. Chinese P&I Club or the government is expected to back its tankers. Iran has its own insurance company.

Till recently, Iran has been India's second largest supplier of crude after Saudi Arabia, meeting about 11 per cent of its crude oil requirements. Following the US and the EU sanctions, public sector oil companies have begun cutting their off-take from Iran and increasing their buys from Iraq and other suppliers. However, for reasons, commercial and strategic, Iran will continue to be a major source for crude supplies to India, and this is why domestic shipping lines have sought government support to get insurance for their tankers carrying Iranian cargo.

Indian Move

Initially, Indian tanker owners asked for a sovereign guarantee for the safety of their vessel carrying Iranian crude. As this was not acceptable to the government, they approached public sector insurance companies. Indian National Ship-owners Association sought a limited cover of $50million for each tanker. Reports indicate that the insurers have agreed to this in principle. “We understand that the insurers have agreed to consider our request but we have yet to get any official communication,” said Mr S. Hajara, President of the Association, who is also the Chairman and Managing Director of Shipping Corporation of India.

The General Insurance Corporation of India and its four subsidiaries are reportedly working out the marine cover, which needs the approval of the Insurance Development and Regulatory Authority. However, the trouble is that Indian insurers may find it difficult to get reinsurance, which means they will have to take the entire risk on their books. In other words, if there is a claim, Indian insurers have to pay from their pocket. In the case of International P&I Clubs, which offer cover up to $1 billion, claims in excess of $8 million are shared by the members of the pool.

Meanwhile, according to reports, some Indian companies are also looking for cover from P&I Clubs in Asia. A report by Platt , an energy industry publication, said an Indian company had approached the Iranian insurer — Kish Protection and Indemnity Club.

Why is THE UK worried?

The UK's move to persuade other members in the EU to delay the sanction against Iran, apparently stems from concern over its impact on the oil price. Britain, according to diplomatic sources, fears that likely disruption in the flow of oil after the sanctions come into force will lead to spike in oil prices. True, oil prices could go up and it could further weaken the European economy already reeling under the economic crisis. Is that all UK is worried about?

A more serious impact of the EU sanction, which could be felt in London in the long run, will be on its marine insurance business. London is the birthplace of marine insurance. Of the 13 international groups of P&I Clubs, more than half are in London. In fact, except for the Japanese Club, most others are in the West. This is despite the fact that a large number of their clients are based outside of Europe. Over the years, the pattern of global trade has changed. So has shipping.

Indian interest

Asia has emerged as a hub of maritime activity. Of the top ten container ports in the world, eight are in Asia, of which five are in China. Europe is virtually out of commercial shipbuilding, while China, Japan and South Korea control it. There are many other examples. Iran exports a large part of its crude output to Asian countries. China, India, Japan and South Korea are the major buyers. All these counties also have their own shipping fleet. And Iran has started settling oil bills with Asian buyers partly in local currency.

Following the EU ban on insurance to Iranian cargo, there have been talks on the need for an Asian group of P&I Clubs. China has its own P&I Club. There is a Ceylon P&I Club. Iran has its own insurer. Japan is already part of the 13-member global group. Emergence of an Asian group of P&I Clubs will wean away the large premiums that UK and European players have so far been earning. This will not be a comfortable situation for the UK.

For India, it is perhaps cheaper to source crude from Iran than from other sources. So, it is in the country's best interests to source it economically. If insurance is the stumbling block, the government should take a cue from Japan or China and step in.

COMMENT NOW