What insurers need to know about increased Russian sanctions

The increased threat of sanctions against Russia following the downing of Malaysia Airlines MH17 should force insurers to look at their books of business that relate to or are connected to the country, argues one leading lawyer.

Daniel Martin, of Holman Fenwick Willan, told GR that restrictions can be imposed quickly, without warning, and with immediate effect, so now is the time for insurers to get prepared.

“Insurers need to be looking at whether sectoral restrictions (restrictions relating to whole sectors of the economy or to all trade in particular goods or categories of goods) will come in next. Recent developments in Ukraine, and in particular the tragedy involving MH17, have caused the US and EU to look again at sectoral restrictions.

“The US has now imposed some measures which make it harder for four Russian entities to access US capital markets, and there has been speculation that similar measures might be adopted in the EU. This is a fast changing area and insurers need to watch this space,” said Martin.

The implications for insurers falling foul of sanctions are not only limited to fines, the sanctions expert warned.

“If you are an EU insurer and you had to pay a claim to a prohibited Ukrainian person then there are the financial implications under the sanctions, but there is also scope for imprisonment for the individual involved. You would also be under intense scrutiny from your bank.

“Besides financial and criminal implications, there are much broader considerations that companies need to be aware of including reputational and commercial issues. I think the banks that have been fined have seen that the reputational and share price consequences are arguably just as damaging as the fines themselves,” said Martin.

Despite the severe consequences of breaching sanctions, Martin believes there are simple steps that insurance companies can make to ensure they stay the right side of the rules.

The London-based lawyer explained that navigating sanctions is simply a compliance issue and at its heart is a simple understanding of who are you insuring and what risks are you writing to avoid the risk you are insuring a prohibited trade.

“Ultimately it is about educating the business and informing the underwriters what type of business they can write so that they can go to their prospective assureds and ask the right questions, so that they, together with the compliance team, can effectively manage the risk,” said Martin.

Also, as a safety net it was suggested that insurers need to have the right wording in the policy, including a strong sanctions exclusion clause.

“There is a market sanctions exclusion clause, but ideally you should think about whether that is enough and whether there is more specific wording that should be included. As an underwriter, you can’t rely on the compliance team unless you give them all of the information they need,” said Martin.

The flip side of any restrictions is an economic cost to companies, and therefore the economies of the nations imposing the sanctions.

“The reason we haven’t yet seen even more onerous sanctions against Russia at an EU and US level is that the cost of putting those restrictions in place to the EU and US is considered to be too high at the moment,” said Martin.