Marine insurance, or lack of it, may yet turn out to be the most effective sanction used by Western nations in 17 years of tightening the screws on Iran's nuclear program.
A European Union oil embargo on Iran, set to take effect in July, prohibits EU insurers from covering Iranian oil exports anywhere in the world. With around 90 percent of the world's tanker insurance based in the West, the arcane world of reinsurance and liability coverage has become a powerful weapon.
Iran, OPEC's second-largest producer, exports most of its 2.2 million barrels of oil per day to Asia, and the four main buyers - China, India, Japan and South Korea - have yet to find a way to replace the predominantly Western cover for the giant crude oil cargoes en route from Iran to refineries across Asia.
And that could dent Iranian crude exports to key markets, particularly Japan, cutting off a valuable source of Tehran's foreign exchange income. Crude oil prices have risen close to 40 percent to above $100 per barrel since October, partly on fears over supply disruptions from Iran.
"The bottleneck is insurance. If that's not settled, we will no longer be able to transport oil," said one Japanese buyer of Iranian oil, who wished not to be named.
Most maritime insurers pool their coverage and tap into the reinsurance market when coverage exceeds $8 million. A typical supertanker - the biggest can ferry some 2 million barrels of crude - is covered for $1 billion against personal injury and pollution claims.
"In China and Russia, the top players still need reinsurance support. The key reinsurance support and the top players always come from Europe," said Vivian Ho, chairwoman of the Marine Insurance Association at the Hong Kong Federation of Insurers.
As the deadline draws near, shippers are asking whether governments should guarantee the clean-up costs of any spills. Others are checking local laws to see if they can bring in shipments on Iranian tankers insured by Iran.
Japan and South Korea are lobbying EU officials to provide exemptions to the sanctions beyond July, but insurance and shipping executives believe a complete ban is likely. EU officials are due to meet on the issue in mid-May.
"The issue everybody has is that somehow they are reinsured or insured into Europe," said a UK-based ship insurance broker. "There's no obvious solution after sanctions are implemented."
Japanese non-life insurers have warned they will only cover a single tanker at a time carrying Iranian crude oil through the Middle East Gulf, industry sources have said.
THE STATE PAYS?
Without some kind of EU exemption, Tokyo and Seoul may need to provide sovereign guarantees to replace lost shipping insurance or force refiners to go elsewhere for crude supplies.
A source at South Korea's Economy Ministry said Seoul was considering sovereign guarantees, but needed to assess the financial impact before making any decision.
"We need to discuss this with other ministries and we're doing so now because government insurance means people's tax money. We need to check the costs and benefits," said the source who has direct knowledge of the matter.
India, too, is considering sovereign guarantees - where the state covers the clean-up cost of an oil spill or other damage - for its shipping lines, or importing oil on tankers insured by Iran, a shipping industry source said.
Some, though, hold out little hope that Tehran would pay up in the event of a collision or spill involving any of its 39-strong tanker fleet.
"The chance is zero," said another Japanese buyer of Iranian oil, who did not want to be named. "Even if Iran said it would, we would have no collateral for that, so we don't know if they really would deliver if such accidents happened."
Asked if Japan would accept Iranian P&I (protection and indemnity) insurance on independent Tehran-based NITC tankers bound for Japan, the source said: "No, we won't consider that. We have no plans to rely on Iranian P&I as we don't really know if they're going to deliver."
There would also be doubts about whether Iranian-backed insurance would be able to pay out against any claim as Western sanctions prohibit transferring cash out of Iran. Similarly, many ships are heavily mortgaged, and bank loan covenants typically state that vessels must be covered by triple-A rated insurers - raising the question as to whether any stop-gap insurance provider would meet that condition.
Another source at a major South Korean shipping firm noted it could be illegal to ship Iranian crude via NITC tankers insured by Iran into South Korea.
"Port authorities would not allow the entry of such shipments unless they are insured by large firms such as P&I Club members."
However, a source at South Korea's Ministry of Land, Transport and Maritime Affairs noted Iran-insured Iranian tankers may be allowed into South Korea, but it would be tough to let them in as Seoul is a close ally of the United States.
"Without European insurance, it will be impossible for South Korea to import Iranian oil from July 1,' the source said.
Iain Anderson, Singapore-based partner at law firm Ince & Co, said it was "difficult to see how sovereign guarantees could replace the essential P&I risk transfer."
"Something close to half of the world's oil passes through the Strait of Singapore. How would a sovereign guarantee respond to a serious collision or grounding situation in the Strait which involves pollution from such a "guaranteed" vessel?" he said.
CLOSER TO HOME
Most of China's tanker fleet, owned by firms such as China Shipping, COSCO Group and Nanjing Tankers, are covered by European insurers and would not be able to transport Iranian oil unless Chinese insurers step in to fill the void once sanctions hit, analysts said.
That's proving tougher since officials with private ship insurer, China P&I Club, told Reuters this month it would not provide cover for tankers carrying Iranian oil.
China's biggest property and casualty (P&C) insurer, the state-owned People's Insurance Company of China Group (PICC), has yet to decide whether to provide such coverage.
"It's not certain whether state-owned insurers like PICC will have to underwrite the business, or whether the government will take out the money, or whether oil companies will have to share some of the risks," said a Beijing-based marine underwriter with PICC. "The risks involved are huge and you often have to pay out more than what you get."
A source with China's only state-owned reinsurer, China Re, said the firm was acting "very cautiously" on Iran-related business, and had not yet decided on whether to cover oil tankers carrying Iranian crude after July.
But Chinese oil buyers may be more open than others to importing Iranian oil on tankers insured by the Middle East country, if the price is right.
"If the oil is shipping from Iran and freight is at a fair rate, of course we can consider taking more," said a trader with a Chinese oil firm that imports Iranian crude.
Relying more on Iranian-insured tankers could help China maintain its substantial crude imports from the OPEC producer. Iran's NITC plans to add at least 12 more supertankers by the end of next year.