Yesterday, the Wall Street Journal had a fascinating piece on the difficulties “the world’s largest group of oil-tanker underwriters” is having figuring out a way to insure Iranian oil shipments. I recommend readers take a look at it to see the kinds of problems that are surfacing as a result of the survival of the U.S. trade embargo with Iran.

In this case, the basic issue is that the London-based International Group of Protection and Indemnity (“P&I”) Clubs, which is “a pool of reinsurers that covers around 90% of the world’s tonnage,” hosts a claims-sharing pool for which the American Steamship Owners Mutual Protection and Indemnity Association, Inc. (“American Club”) is a participant. Because the U.S. maintains a trade embargo with Iran prohibiting most U.S. person transactions with Iran or Iranian parties, the American Club — a U.S. entity — is barred from providing cover both to Iranian entities and for claims by Iranian entities. Because of these restrictions, how to isolate the American Club from the International Group’s claims-sharing pool as it relates to Iran-related dealings – all the while not exposing non-U.S. insurers and reinsurers to additional liabilities – is a subject of serious concern.

This is not a newfound problem, either. According to a circular issued by The London P&I Club, the International Group:

…has repeatedly made it clear in its engagements with U.S. authorities since 2010 that the primary U.S. sanctions measures affecting U.S. insurers and reinsurers are a significant concern to the Group, giving the not insignificant U.S. reinsurer participation on the Group General Excess of Loss programme.

Moreover, the Circular adds that “International Group Club rules provide that the risk of shortfalls in recoveries within the [claims-sharing] pool…remain with the Member and the [Group] is actively looking at possible options to avoid, or mitigate, this risk…”  In other words, the U.S. trade embargo with Iran is flouting the mechanism by which reinsurers share the burden of insurance risk and is thus exposing them to serious potential liabilities as a result.

According to the Wall Street Journal, the International Group is discussing with the Treasury Department  a possible “interim solution,” which would involve setting up a “reinsurance program designed to respond to default by U.S. reinsurers because of [U.S.] sanctions…” However, the much hoped-for and longer-term solution would involve OFAC authorizing U.S. reinsurers via specific license “to contribute to liabilities arising out of Iranian shipments and incurred by Iranian vessels.” Is this long-term solution likely to happen anytime soon? I don’t have bets in its favor.  After all, this is an issue that OFAC has apparently not moved on for more than a half-decade, despite being in dialogue with global insurers and re-insurers about it.

The broader issue, though, is having left an era in which foreign parties were restricted in the kinds of activities they could engage Iran, many have forgotten how impactful the U.S. trade sanctions can be on foreign firms seeking Iran-related business. The troubles of the International Group are just one small example, even if their potential effect and the headaches they are causing for reinsurers are quite large. The fact is that the U.S. restrictions on the activities of U.S. persons and companies creates enormous incidental effects for non-U.S. persons and companies interested in re-engaging with Tehran in the post-deal period. We’re seeing a lot of those problems in live-time right now and how foreign companies handle it will prove instructive.

The other big question is how the U.S. government will handle these issues. Instead of being non-responsive or ambiguous as to potential solutions to sanctions issues such as these, will OFAC start problem-solving in order to facilitate foreign business ties with Iran, even if it means permitting U.S. companies to have tactic relations with Iran on the margins? Recall that the Joint Comprehensive Plan of Action (“JCPOA”) requires the U.S. and other major world powers to revisit their sanctions-lifting obligations should any surviving sanctions or restrictive measures interfere with Iran’s ability to freely engage in the activities outlined at § 7 of Annex II of the JCPOA.  How OFAC responds to issues like these, then, could have major national-security implications that cannot be understated.