The Centre should not give up on its plans of creating a sovereign fund to back Indian insurance companies on their liability cover for tankers carrying Iranian crude and for refineries processing the same. It should go ahead irrespective of whether or not the European Union (EU) suspends its ban on reinsurers covering risks associated with shipping and refining Iranian oil, a possibility following Tehran’s recent deal with western powers over its nuclear programme. Indian insurers have the capacity to provide normal cargo insurance limited to spoilage, losses or theft. But they cannot afford to offer third-party liability cover against claims arising from the cargo-carrying ships colliding or causing oil spills and other environmental damage.
That is where the power of Europe-based Protection & Indemnity (P&I) Clubs lies. They insure roughly three-fourths of the world’s ocean-going tonnage and extend up to $1 billion cover to individual crude carriers. This is against the $50 million P&I risk that GIC, India’s sole reinsurer, is willing to bear. Indian insurers rely on the European reinsurance market even to hedge their exposures against claims by refineries. Deprivation of European reinsurance/P&I support following the EU ban last July has been the most potent western sanctions instrument, causing India’s crude imports from Iran to fall from 420,000 to 263,000 barrels per day between 2009-10 and 2012-13. Imports are now being undertaken largely in Iranian vessels and underwritten by the Islamic Republic’s own insurance providers/P&I Clubs.
The EU insurance sanctions, which remain fully in force, may be lifted in the coming weeks. But given the uncertainties still surrounding Iran’s compliance and the temporary nature of the agreement, there is no guarantee that sanctions will not be re-imposed. Establishing an Indian P&I Club to protect domestic ship-owners from being at the complete mercy of foreign insurers is anyway a good idea. Neither our shippers nor our insurers have the financial resources to meet each others’ third-party liability losses, which could run up to hundreds of millions of dollars. This is where the Centre can step in by providing a guarantee cover similar to that approved by Japan’s Parliament in June 2012 for keeping its oil trade with Tehran going. This is a clear case of market failure – underwriting of risks not occurring for purely geopolitical reasons – that warrants government intervention. True, India has more than made up for reduced Iranian supplies through increased sourcing from Iraq, Venezuela and elsewhere. But that should not stop it from continuing to import from Iran so long as there aren’t any binding United Nations sanctions.