Sanctions and Non-proliferation in the Insurance Industry
In at least three ways the insurance industry is an enabler of activities and thus has a responsibility to ensure those activates do not threaten international peace and security, including the proliferation of Weapons of Mass Destruction.
First, programmes of concern, such as those in Iran and North Korea, typically require goods from the international marketplace. This kind of trade is often dependent upon insurance: for example, through a “letter of credit” offered by a bank, or by the issuing of an insurance policy covering a vessel in which the goods are shipped.
Second, infrastructure with possible use in proliferation often also requires insurance in order to limit the liability of an incident. A nuclear power plant, for example, may well be insured through insurance ‘pools’ so that in the case of an accident the owner of the facility has limited liability.
Third, there are the indirect effects of providing insurance services. For example, if an insurer provides services to a business sector, which itself creates the necessary resources to allow a government to continue with its programme of concern, then the insurer is, de facto, supporting proliferation. Examples of this would include providing insurance cover to Iran’s oil and gas sectors, which are restricted by sanctioned since they are a key source of revenue for the Iranian government.
Why the Insurance Industry should care about Sanctions
The insurance industry has an obligation to adhere to the letter of the law in all cases. It is often prudent from a risk mitigation perspective, however, to adhere not only to the letter but also the spirit of such laws. Failure to do so can result in unmanageable reputational risks, an undesirable risk landscape for future business, and the untold costs, in terms of business resources, of providing policies that cannot be fulfilled..
In practice, it is often diligent to adhere to US unilateral sanctions measures, even when not subject to US laws. There are a variety of reasons why this is prudent. First, US laws are increasingly extraterritorial, meaning that firms conducting trade which would be prohibited if the firm was US-owned could, for example, be prohibited from conducting certain business in the US, including supplying the federal government or accessing the US financial system. Second, US law makers have demonstrated a resolve to restrict further the provision of trade-related services from the international marketplace The insurance industry can pre-empt the imposition of new laws and extraterritorial measures by adopting systems and processes now which appropriately manage the changing risk landscape.
What the Insurance Industry could do to Protect Itself
Insurance firms should consider taking a systematic approach to the implementation of non-proliferation and sanctions measures. This systematic approach must be supported by the company’s top management and in the form of both training and guidance for company staff. The systematic approach has two aspects:
For the insurance industry, compliance with trade controls typically involves the screening of policies against lists of designated entities, using screening systems specifically intended for this purpose. The objective is to ensure that any matches between a party to a policy and a “designated entity” are identified and managed.
US unilateral measures also require insurers to exclude policies covering certain proscribed activities with countries such as Iran. This typically requires the insurer to collect information from the prospective policy holder on the nature of their business and to ensure that the provided information is valid. In practice, this may be achieved by asking the policy seeker to complete a questionnaire thereby introducing a self-declaration clause in the policy, rendering the policy invalid if it emerges that illegal activities have been undertaken.
When a policy is not, strictly speaking prohibited according to the terms of the compliance process, the insurer should evaluate the benefits and risks associated with accepting the policy. This is primarily the task of an underwriter, but underwriters can also be supported by a risk management function.
Policies can pose a number of risks from a proliferation perspective. The primary risks are as follows:
- That a facility seeking insurance, such as a nuclear reactor, is involved in the production of Weapons of Mass Destruction or prerequisite materials;
- That a policy in other ways enables trade in prerequisite materials which can be used in the production of Weapons of Mass Destruction
Insurers can mitigate the risks posed by such policies by ensuring that government-led measures, such as export controls and IAEA safeguards, are adhered to by the policy holder.
Alpha for Insurers
Alpha is developing guidance for insurers on implementing non-proliferation and sanctions from a compliance and risk management perspective. Alpha also maintains information useful for implementing these systems in practice, such as country profiles. Finally, Alpha offers training for compliance and risk management professionals. Click here to find out more about Alpha’s services and memberships.
 Since insurance payments cannot be made when illegal activity is evident, policies which relate to proliferation cannot ultimately be fulfilled.