reicon14 session 5 ppt final

Reinsurance Roundtable

September 15, 2014

Regulatory Investigations in the

Reinsurance Industry

The Speakers

Inna TsimermanMarsh & McLennan Companies, Inc.

Scott MansolilloW.R. Berkley Corporation

Seth Eichenholtz Swiss Re America Holding Corporation

Seema A. Misra, ModeratorStroock & Stroock & Lavan LLP

AgendaI. Background

A. How sanctions work and key sanctions programs

B. Iran Sanctions

C. New Ukraine-related sanctions (Russia)

II. Sanctions and Reinsurance

III. Compliance Challenges and Considerations

IV. Challenges In Responding To Regulatory Requests For Information

I. Background

Main Objective of Sanctions:◦ Induce change by governments disfavored by the

international community Foster regime change in Syria and Libya Force Iran to stop developing nuclear weapons Force Russia to respect Ukraine’s territorial integrity

◦ Reduce/eliminate resources to terrorists, drug traffickers, nuclear proliferators, etc.

◦ Types of sanctions: Trade embargoes Export controls Asset freezes/travel bans

Iran Sudan Syria North Korea

CubaKey sanctioned countries

Organizations/deposed governments

Vessels

These are targeted because they are associated with:

Sanctioned countries or

Weapons of mass destruction

proliferation or

Terrorist activity or

Criminal activity (e.g. drug

trafficking) or

Human rights violations

Aircraft

Individuals

Russia

http://en.wikipedia.org/wiki/File:Flag_of_Russia.svg

Office of Foreign Assets Controls (OFAC)

A division of the U.S. Department of the Treasury that administers and enforces U.S. sanctions programs and embargoes.

Sanctions generally apply to all “U.S. persons” U.S. persons are (i) U.S. citizens and permanent resident

aliens, (ii) U.S.-organized entities, and (iii) persons in the United States.

In some cases (Cuba/Iran) “U.S. persons” also includes foreign branches and subsidiaries of U.S. companies.

Applicable Sanctions Regimes

Sanctions Programs are of two principal types:◦ Specially Designated Nationals (“SDNs”/Blocked Persons)

over 6,000 entities, individuals, vessels and aircraft on the current SDN List Other blocked persons include Cuban, Iranian and Syrian governments

◦ Country programs Embargoes/trade sanctions in place for numerous countries that prohibit trade,

investment and other financial transactions.

U.S. has 20 separate sanctions regimes in effect today◦ Iran, Sudan, Syria, North Korea and Cuba – broadest programs

European Union has 26 sanctions regimes in effect◦ Many the same as the U.S.◦ Cuba not included◦ China is included

OFAC Enforcement Authority OFAC violations are subject to substantial criminal and civil

penalties Civil penalties can be up to $250,000 or twice the amount

of the subject transaction, whichever is greater Civil penalties are based upon a “strict liability” basis Existence of a compliance program is a mitigating factor in

determining the amount of a penalty Reputational damage is just as significant as OFAC

publishes all penalties on a monthly basis Criminal penalties can be as high as $1 million fine and/or

imprisonment for up to 20 years

Direct Sanctions: U.S. Law Prohibitions: “OFAC sanctions” generally prohibit virtually all

trade with Iran, including - Direct or indirect import to and export from Iran of goods, technology

and services. Engaging in any transaction or dealing in or related to Iranian origin

goods, services or technology. Engaging in any transaction related to goods, technology, or services

for sale, supply or exportation, directly or indirectly, to Iran. Facilitating any prohibited transaction.

Applicability: (1) U.S. nationals, (2) U.S. companies, (3) persons in the U.S., and (4) foreign subsidiaries of U.S. companies (since October 2012 under the Iran Threat Reduction and Syria Human Rights Act (“TRA”)).

Iran Sanctions

Boycott of Iran: The President is required to designate and impose penalties on any company anywhere in the world (or its affiliates) engaged in certain “sanctionable” conduct.

Companies anywhere in the anywhere in the world could be impacted. Sanctionable conduct: Specified activities related to:

a) Iranian petroleum and petrochemical products, and Iran’s petroleum and petrochemical sectors,

b) Iran’s nuclear and weapons sectors,

c) Iran's energy, shipping, and shipbuilding sectors,

d) The provision of (re)insurance for any activity that is prohibited or sanctionable under U.S. sanctions against Iran.

Penalties: Restriction of access to the U.S. trading and financial systems. Temporary Sanctions “Suspension” - Joint Plan of Action: This relief and temporary

and limited. U.S. companies and foreign companies owned or controlled by them continue to be prohibited from engaging in virtually all services directly or indirectly with Iran.

Iran Sanctions (con’t)

Indirect Sanctions:

Escalating Sanctions: Since March 2012, the U.S., EU, Canada and other governments have been designating additional Russian individuals (chiefly Putin cronies), new leadership in Donbass and the government of Crimea, and companies as sanctions targets. ◦ Sanctions measures consist of asset freezes and travel bans (in the case of the E.U.) or wholesale prohibitions on

transactions as well as asset freezes and travel bans (in the case of the U.S. and Canada).

New Capital Market (Sectoral) Restrictions: The U.S. and the EU imposed new sanctions in the form of capital market restrictions against specifically designated Russian banks and companies (including Rosneft Gazprombank). ◦ Unlike other sanctions mechanisms, these capital market restrictions do not prohibit any other kinds of

transactions with the listed banks or companies.

New Export Controls: The U.S. , EU and Canada have also implemented significant new export restrictions related to:◦ Armaments and military technologies, and dual use technologies, to Russia; and ◦ Goods and technologies for the Russian petroleum sector (deep water exploration, Arctic, shale)

Russian Response: Russian retaliatory/responsive measures have been minimal but could ramp up: Import restrictions on Western foodstuffs to Russia; travel bans against named Western government officials. New data protection legislation restricting transfer of personal data outside Russia may be implemented on

an expedited basis.

Ukraine-Related Sanctions (Russia)

II. Sanctions & (Re)Insurance Industry Examples: A property insurance policy covering an international hotel

chain with hotels in Iran. A marine cargo or “goods in transit” policy insuring a

shipment of Sudanese crude oil from Egyptian ports to a Spanish buyer, or Cuban sugar shipped from a Venezuelan port to a Brazilian buyer.

An aviation policy for a foreign airline known to have regular flights to Cuba.

Providing travel insurance to a group of Canadian tourists for travel to Cuba.

Sanctions and the Reinsurance Industry

Sanctions laws apply to insurance and reinsurance, and prohibit :

1. Doing business or engaging in transactions with or related to targeted countries, organizations, individuals, vessels and aircraft; and

2. Helping clients/cedents/insured, even indirectly, to do business in targeted countries or with sanctioned governments, organizations, individuals, vessels, and aircraft.

Facultative: Reinsurance coverage for a specific risk under an individual policy requires the reinsurer to

scrutinize all relevant underwriting information, similar to a primary insurance placement, and decline coverage that would violate sanctions rules.

Treaty: much more difficult from a sanctions perspective Due diligence is very difficult:

May not know ultimate insured Need to understand if ceding company and/or broker has done sanctions review Treaty may need to include appropriate exclusionary language to protect against potential sanctions violations

OFAC Insurance Reviews

For the period July 2006 – July 2014:◦ Total insurance files – 386◦ Reinsurance files – 68

14 open/54 closed

◦ 14 open – 10 enforcement/4 licensing◦ 40/68 involve either Cuba or Iran sanctions programs◦ 54 closed – only 3 with penalties

Aon International Energy - $36,000 HCC Insurance Holdings - $38,000 Gen Re Corp. - $59,000

AON Energy

In 2011, OFAC reported that AON International Energy, Inc., Houston Texas (“AON Energy”), a subsidiary of Aon Corporation in Chicago, had settled allegations of violations of the Iranian Transaction Regulations.

In October 2005, AON Energy facilitated the placement of coverage and the payment of premiums for facultative retrocession reinsurance that reinsured construction risks associated with a petroleum project on Kharg Island in Iran.

http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/02012011.pdf

AON Energy Aon Energy brokered and placed the reinsurance on behalf of a

European reinsurer with two European retrocessionaires.

The combined premium for the two retrocession reinsurance placements was $62,883.

The settlement amount was $36,000


AON EnergyOFAC reported that the Settlement reflects the following

Aon Energy provides specialized insurance services resulting in transactions that were particularly harmful to the sanctions program; OFAC viewed the apparent violations as part of a pattern of reckless, but not egregious, conduct by Aon Energy in connection with these policies; Aon Energy, under the direction of its parent, Aon, took several steps to strengthen its OFAC compliance program and its existing OFAC procedures after the apparent violations; Aon Energy has not been the subject of prior OFAC penalties or other OFAC administrative actions; and Aon Energy cooperated with OFAC and also entered into a tolling agreement with OFAC which was undertaken by Aon on behalf of Aon Energy.


General Reinsurance Corp.

In 2011, it was reported that General Reinsurance Corporation (“Gen Re”), had paid $59,130 to settle liability for apparent violations of the Iranian Transactions Regulations, 31 C.F.R. part 560, that occurred in July and August 2005



The alleged violations consisted of two reinsurance claim payments to the Steamship Mutual Underwriting Association Limited (“Steamship Mutual”) for losses arising from vessel operations of the National Iranian Tanker Company. Gen Re made the excess of loss claim payments pursuant to its facultative reinsurance obligation to Steamship Mutual for the coverage period June 16, 1998, to February 20, 2002.



The combined amount of the two reinsurance claim payments was $309,740.65.

The base penalty for the apparent violations was $131,424.

Settlement amount was $59,130


OFAC reported that the Settlement reflects the following: Gen Re is the largest U.S. reinsurer and one of the largest reinsurers in the

world; The apparent violations resulted from activities of certain claims personnel,

including a Vice President for Claims, that were contrary to Gen Re sanctions compliance policies and procedures;

Gen Re subsequently installed enhanced sanctions compliance software and implemented training programs for personnel who have a high probability of encountering sanctioned transactions

Gen Re substantially cooperated with OFAC by signing a tolling agreement and promptly responding to all requests for information;

Gen Re has not previously been the subject of OFAC penalties or other OFAC administrative actions



American International Group, Inc. In May, OFAC reported that American International

Group, Inc. (“AIG”), an international insurance and financial services organization headquartered in New York, New York, agreed to remit $279,038 to settle potential civil liability for 3,560 apparent violations of the Cuban Assets Control Regulations, 31 C.F.R. part 515, that occurred between January 1, 2006, and March 29, 2009.

http://www.treasury.gov/resource-center/sanctions/CivPen/Documents/20140508_aig.pdf

American International Group, Inc.

Between January 2006 and March 2009, two AIG subsidiaries in Canada issued or renewed three types of property and casualty insurance policies that insured Cuban risks of a Canadian corporate entity for an estimated aggregate premium of $486,137.71. The polices involved Comprehensive General Liability, Director’s and Officer’s (“D&O”) Excess Liability, and Pollution Legal Liability coverages.

One of the AIG subsidiaries in Canada also maintained a D&O Liability insurance policy that insured certain directors and officers of three Cuban joint venture partners of a Canadian corporation between January 1, 2006, and October 4, 2006. The estimated total premium for D&O coverage during this time period was $55,578.08.


American International Group, Inc. Separately, from March 17, 2006, through September 30, 2008,

Travel Guard Canada—an AIG subsidiary in Canada—sold, renewed, or maintained in force 3,446 individual or annual multi-trip travel insurance policies in which the insured identified Cuba as the travel destination. The total premium collected for these policies was $337,973.25. During the coverage period of these 3,446 policies, and extending to December 31, 2008, Travel Guard Canada paid 103 claims for a total value of $96,910.47.


American International Group, Inc. OFAC reported that the Settlement reflected: Aggravating Factors: AIG, including certain members of the institution’s management,

had actual knowledge of the conduct that led to the apparent violations; AIG’s conduct resulted in harm to U.S. sanctions program objectives; and the compliance programs of AIG’s two Canadian subsidiaries were inadequate at the time of the apparent violations.

Mitigating Factors: AIG has not received a penalty notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations; AIG has taken appropriate remedial action in response to the apparent violations; and AIG cooperated with OFAC’s investigation by submitting a voluntary self-disclosure and executing a statute of limitations tolling agreement and multiple extensions of the agreement.


Within the framework of global operations, reinsurers and intermediaries should consider their sanctions risk profile taking into account not only the kinds of coverages and where they have operations, but also where their clients have operations and where clients’ trading partners may be located.

• There are some unique challenges here – information may not be available at the time of broking or underwriting to the broker, (re)insurer or even to the insured!

Due Diligence: Consider that appropriate level of due diligence.

• What is “reasonable” to know and request?

• There may be different answers depending upon the type of reinsurance at issue (e.g. Marine verses GL versus Energy vs Property and Facultative versus Treaty)

• What do you screen? When do you screen and how often?

• Think about what you do not screen (e.g. Underlying riskholders/insureds)

• Reevaluate periodically – what is reasonable changes over time.

III. Challenges - Risk Analysis and Risk Mitigation Generally

Reinsurance Covering Global Risks

Global policies raise the issue of covering sanctions-prohibited risks.

Use of “exclusionary clause” language to exclude coverage for risks that would violate applicable sanctions laws is critical.

If an exclusionary clause is not possible, the reinsurer should consider applying for a license for the policy from OFAC or other applicable regulator.◦ Separate license will be needed to pay any claims under that policy that

violate OFAC prohibitions.◦ OFAC licensing process is time-consuming (may take up to 12 months)

and may be limited in its application.

Sanctions exclusions consider the use of trade sanctions exclusions or territorial

exclusions to address trade sanctions risk.

• The OFAC FAQs address the use of trade sanctions exclusions:

102. How can an insurer participate in worldwide insurance markets through global insurance policies if, by definition, coverage extends to potential risks in sanctioned countries?

The best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in global insurance policies an explicit exclusion for risks that would violate U.S. sanctions law. For example, the following standard exclusion clause is often used in open marine cargo policies to avoid OFAC compliance problems: “whenever coverage provided by this policy would be in violation of any U.S. economic or trade sanctions, such coverage shall be null and void.” The legal effect of this exclusion is to prevent the extension of a prohibited service (insurance or risk assumption) to sanctioned countries, entities or individuals. It essentially shifts the risk of loss for the underlying transaction back to the insured - the person more likely to have direct control over the economic activity giving rise to the contact with a sanctioned country, entity or individual. [11-16-07]

◦ 103. What if the commercial setting and/or market circumstances of a global insurance policy does not permit the use of an OFAC exclusion such as the one noted above?

◦ OFAC recognizes that U.S. insurers often compete in international markets where non-U.S. insurers are willing and able to issue global insurance policies without a U.S. sanctions exclusion. In cases where such an exclusion is not commercially feasible, the insurer should apply for a specific OFAC license for the global insurance policy. In making a licensing determination, OFAC will review the facts and circumstances of each global insurance policy, including both risk frequency and risk severity, to assure that issuance of the policy will not undermine U.S. foreign policy goals. A separate license would be required for the insurer to pay claims arising under any authorized global insurance policy. [11-16-07]

◦ 104. Can an insurer offer global travel insurance and worldwide travel assistance without violating U.S. sanctions?

◦ The provision of all travel related services are authorized for all OFAC country sanctions programs (including Burma, Iran and Sudan) except Cuba. Travel related services may only be provided in Cuba pursuant to a valid general or specific OFAC license. If the traveler is a U.S. person traveling to Cuba pursuant to a valid OFAC license, travel insurance may be issued to the traveler by a U.S. insurer without a separate license. While there are some instances when U.S. persons travel to Cuba without a valid license (and thus pose sanctions problems for U.S. travel insurers), U.S. travel insurance providers most frequently face sanctions problems when they offer travel insurance products to third country nationals traveling to Cuba. In such cases the U.S. insurer must obtain a license to issue the travel insurance product. Additionally, insurers must also be sure to check OFAC’s list of Specially Designated Persons to ensure that no services of any kind are rendered to persons or entities on this list. [02-11-08]

Sanctions exclusions:

• Consider the terms of the exclusion and its effect. Does the exclusion exclude cover for claims where there would be a violation of law or where there would also be an exposure to penalty even without a violation (e.g. what about extraterritorial sanctions laws such as ISA and IFCA)?

• An increasingly used exclusion is the Lloyd’s LMA 3100:

No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.

• Not all insurers, reinsurers and brokers are equally positioned

• Because of differences in trade sanctions laws, the effect even the same sanctions exclusion language may be different depending on the parties to which it applies.

IV. Other Regulatory Inquiries

Insurance Circular Letter No. 6 (2013)

To “all Alien Accredited Reinsurers Writing Business in New York State”

This Circular Letter seeks information concerning accredited reinsurers’ compliance with the Iran Freedom and Counter-Proliferation Act of 2012 (“IFCPA”).


Recently, the Department learned that several companies have insured trades made with Iran. The information received by the Department parallels recent news reports of a pattern of trades made by Glencore Xstrata and Trafigura with Iranian entities. While these particular transactions may not have violated the sanctions regimes in place in the relevant countries at the time, engaging in a similar transaction now could be found to violate the IFCPA. The resulting sanctions could jeopardize the ability of any involved insurer to conduct business in the United States. The purpose of this letter is to seek information about reinsurers’ plans to implement compliance and due diligence programs designed to avoid any potential violations of the IFCPA.


◦ Identify all lines of business, or any other insurance service, that you, your parent(s), affiliates or subsidiaries write or provide, that may be subject to sanctions under the IFCPA.

◦ Explain all policies and procedures in place to ensure compliance with the IFCPA.◦ Provide the Department with representative copies of the relevant compliance

policies and procedures.◦ Explain how, when underwriting a policy, you ensure that your underwriters

correctly ascertain whether the policy may cover transactions that are prohibited by the IFCPA. Include within your answer how, and to what extent, representations made by a potential insured are verified.

◦ Explain what information you require an insured to provide to you regarding each shipment covered by a maritime policy, including: (1) the port of origin of the shipment; (2) the nature of the goods being shipped; and (3) whether the shipment involves or is the for the benefit of a SDN.


◦ Explain what rights you have to verify whether an insured’s representation about the nature of cargo insured under a marine policy is accurately represented and state the number of time in the last three years that you have exercised those rights.

◦ State whether, following the news reports concerning the Glencore Xstrata and Trafigura, you reviewed your in-force policies to determine whether you insured any of the reported transactions. If yes, please indicate whether you conducted the review before the receipt of this letter and the nature of your review.

◦ Produce a copy of every policy issued by you, a parent, affiliate or subsidiary, to Glencore Xstrata or Trafigura that remains in force on or after July 1, 2013.

◦ Identify any instance in which you have invoked a sanctions clause to refuse payment of a claim. For each instance, please explain how you became aware of the claim and how the claimant responded, and state whether you currently insure the claimant.

◦ List all insureds that you have identified as potentially engaging in business with Iran or any entity or person affiliated with Iran.

Issues Raised By Responding To Regulatory Requests

Questions

Seth Eichenholtz Swiss Re America Holding Corporation 914-828-8951; [email protected]

Scott Mansolillo W.R. Berkley Corporation 203-629-3039; [email protected]

Seema A. Misra Stroock & Stroock & Lavan LLP 212-806-5675;[email protected]

Inna Tsimerman Marsh & McLennan Companies Inc. 312-683-7583; [email protected]

Speaker Contact Info