Will insurance respond to the risks from sanctions?
Following the invasion of Ukraine, managing sanctions risk becomes more complicated for enterprises with any exposure to international commerce.
When Russian forces launched their invasion of Ukraine in February 2022, it wasn’t just Ukrainian defense forces that had to scramble to respond. So, too, did enterprises outside Russia who suddenly found themselves cut off from their Russian buyers and suppliers by economic sanctions imposed by Western nations and international organizations.
After the first week of the assault, it’s difficult to assess how that readjustment is going, but it’s been reported that private companies are even going beyond what government sanctions require to cut their business ties to Russia.
Ironically, the unprecedented broadside of sanctions against Russia comes at a time when the United States and its European allies were reconsidering the value and effectiveness of economic sanctions in international relations.
There were 37 active sanctions programs operating under the U.S. Treasury Dept.’s Office of Foreign Asset Control (OFAC) in October 2021, according to a report by the department; that total does not include others sanctions programs operated by the State Dept. or Commerce Dept. Overall, the number of U.S. “sanctions authorities” has more than doubled from 2000 to 2021, from 69 to 176, while the number of individuals and entities targeted for sanctions has increased tenfold, from 912 to 9,421.
‘Smarter sanctions’
While acknowledging some successful outcomes of sanction campaigns, the Treasury Dept. says economic sanctions have become “a tool of first resort” in addressing threats by U.S. adversaries, and that repeated use of sanctions is driving even U.S. allies to develop ways to evade them. A significant example of that came in January 2019 with the launch of the Instrument in Support of Trade Exchanges (INSTEX), a European entity to facilitate transactions with Iran while avoiding sanctions imposed on that country by the U.S. under President Donald Trump.
Growing discomfort with sanctions that punish ordinary people with no effect on wrongdoers has led to efforts to develop “smart sanctions” designed to target specific terrorists, drug traffickers, human rights abusers, and their networks of associates. As an example of this approach, sanctions initiated in 2017 against an Israeli billionaire and his companies are believed to have been instrumental in convincing an African leader to cede power.
While the smart sanctions approach seeks to be humane in meting out economic punishment, it makes the job of navigating sanction rules more complicated for enterprises with any exposure to international commerce. It’s one thing to avoid an entire country you probably don’t want to deal with anyway; quite another to avoid transactions with legitimate businesses subject to sanctions because of their connections.
Little help from insurance
Insurance is generally of little help in addressing sanctions risk.
For one thing, policies covering ocean cargo and entities with international exposures often have sanctions exclusions stating that the policy will provide no coverage or payments if, by doing so, the insurer would violate an economic sanction.
“Political risk” insurance is provided to cover insureds for losses due to political violence, civil unrest, expropriation of property, sovereign debt default, and other perils arising from political, social, and economic conditions. At times, political risk coverage may extend to property rendered unusable or unsalable by sanctions while it is in or enroute to a targeted country.
Beyond that, political risk insurance is of limited use in addressing economic losses due to sanctions. Covering such losses completely would expose carriers to open-ended risk for loss of markets, an exposure not typically covered by insurance. Sanctions coverage would also create a moral hazard in that governments might be more inclined to impose sanctions if they thought their countrymen were insured for any resulting losses.
While sanctions risk might not be fully insurable, assessing exposure to potential sanctions and identifying business options if they are imposed are essential risk management functions that can leverage the expertise of political risk underwriters.
Insurer duties
Unlike banking and other financial services, property and liability insurance is not viewed as much of a vehicle for laundering funds or facilitating illegal transactions. Nonetheless, agents, brokers, carriers, claim adjusters, and other property/casualty entities and individuals subject to U.S. jurisdiction are required to adhere to and enforce sanctions against persons and entities identified by OFAC.
As an example, in October 2020 OFAC reached a settlement with Generali Global Assistance, a US travel insurer, for $5.9 million for violations of sanctions against Cuba between 2010 and 2015. In this case, Generali had reimbursed its Canadian affiliate for medical and other insured expenses incurred by Canadians insured under Canadian policies while traveling in Cuba.
OFAC enforcement is carried out on the basis of strict liability, so even inadvertent violations can be subject to civil and criminal penalties, and those penalties can be applied to individuals as well as companies.
The segmented manner in which insurance is provided makes the business vulnerable to sanctions violations, according to Martin Schofield, a financial crimes specialist based in the United Kingdom.
As Schofield sees it, producers are tempted to believe that the job of screening applicants for being subject to sanctions can be left to insurers who execute the transaction of providing coverage in exchange for premium.
For their part, carriers are tempted to assume that brokers have screened their applicants, and both parties are prone to believe that an applicant or undertaking with bank financing has already been screened for inclusion on a sanctions list. The assumption that someone else has done or should do the screening extends to claim adjusters, reinsurers and others in the chain of insurance processes.
This happens, Schofield writes, because enforcement actions against insurance entities over sanctions violations are relatively rare compared to other financial services. He notes, however, that “a lack of enforcement action is hardly a justifiable reason for lack of controls.”
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