Qatar restrictions and the potential implications for the insurance/reinsurance industry
On Monday 5 June 2017, a number of countries including Bahrain, Egypt, Saudi Arabia and the United Arab Emirates (the G4) severed diplomatic ties with Qatar and introduced unprecedented restrictions. These included cutting land, air and sea travel to and from Qatar and (save for certain exceptions) expelling Qatari citizens from their respective jurisdictions.
Matters continue to develop and it is understood that formal regulations implementing those restrictions are in the process of being published. The word “sanction” was used for the first time in an official directive in the “Implementation Process of the Decision Related to Qatar Sanctions” Directive issued by the UAE Federal Transport Authority on 11 June 2017.
Previous articles issued by Kennedys discuss potential implications in areas where there are formal directives - such as the aviation and marine sectors. We now address possible implications for the wider insurance industry.
The implications of a regional sanction
As matters stand, certainly in UAE, no new laws or regulations have been issued directed at the insurance and/or reinsurance sectors. Further, while the term “sanctions” is now being used, as the issue is currently confined to the G4, Yemen and other countries in northern Africa, it is not a global sanctions issue in the same sense as the Iran sanctions, because neither the US nor the EU are involved.
On that basis, the immediate effect on the insurance industry is likely to be restricted to insurers and reinsurers based in the countries imposing restrictions, rather than those domiciled in other major insurance hubs such as London, New York or Singapore, unless the underlying risk is in Qatar and the underlying reinsurance runs through (say) one of the G4.
In addition, some of the common generic sanction clauses found in insurance and reinsurance contracts, such as “LMA 3100”, will not apply, as they are restricted to sanctions by (for example) the EU, UK and USA. On the other hand, any “Economic Sanction” clauses or exclusions that are written into insurance and reinsurance contracts that relate to risks in Qatar should be reviewed.
Practical effect on insurance businesses
The immediate impact on the insurance industry arises from practical and commercial considerations. For example, there are reports that many banks in the Gulf region have cut or suspending trading with Qatari banks and financial institutions, including a cessation of trading in the Qatari Riyal, while they await guidance and directions from their respective central banks/regulators. As of now, only the Saudi Arabian Monetary Agency has formally directed banks in Saudi Arabia not to process payments denominated in Qatari Riyals.
The initial steps taken by the banks of the G4 may impact on the ability of Qatar-based insureds and cedants, and their G4-based reinsurers, to pay or receive premiums or claim payments relating to Qatari risks. It could also impact on Qatar-based service providers (such as adjusters and forensic specialists) receiving payment from insurers/reinsurers in the G4 and vice-versa. Furthermore, in view of the travel restrictions, it will become difficult for insurance professionals, such as brokers, underwriters and loss adjusters, who have GCC-wide responsibilities but are based in either the G4 or Qatar, to continue to manage their businesses into or out of Qatar. The initial response may be to redirect responsibility for Qatari risks to the unaffected insurance markets such as London.
In terms of claims, Trade Credit and Political Risk policies may be directly exposed to the extent there is cover designed for such eventuality. Beyond that, because of the restrictions, there is an increased risk of claims where these can be triggered by a commercial default, alternatively by a lack of maintenance. For example, there are many large construction projects in Qatar that may be affected as a result of the current restrictions/sanctions, which in turn may lead to claims under the various types of covers available. Much will depend on the terms and conditions of each policy. For an analysis of the likely impact on the Construction sector.
The situation will continue to develop and, until it has been resolved, all participants in the insurance industry with some financial interest in Qatar or a Qatar-based risk should continually re-evaluate their positions in whatever insurance arrangements they enjoy, arrange or underwrite.