Additional considerations when dealing with Economic Sanction risks

Reinsurers need to have adequate systems and control measures in place to prevent infringements of applicable sanctions legislation. They should also have an in-depth understanding of the sanctions regimes that apply to any of their managing agents, other role players or stakeholders.

This understanding is crucial because sanctions legislation:

a. Prohibits persons / entities to engage in any activities that may circumvent sanctions;

b. Stipulates that reinsurers may not structure transactions so as to sidestep the effects of international sanctions; and

c. Prohibits the facilitation of any activities that would cause an infringement if performed by the reinsurers.

Breach of economic sanctions legislation is regarded as a criminal offence punishable by imprisonment, a substantial fine or both.

Where reinsurers therefore have reason to believe that the business they are about to underwrite will infringe international sanctions, they should consider not underwriting the business at all. In the same breath sanction risks that come to their attention post-underwriting stage should be addressed effectively and without delay.

It is imperative for reinsurers to stay abreast of the latest developments in sanctions legislation at all times, especially in light of the fact that sanctions are fact-intensive and constantly changing. Existing business which had a low sanctions risk at underwriting stage should also be reviewed on a regular basis.

There are many due diligence and screening processes that can be adopted to better assess and manage exposure to sanction risks. Those who wish to get to grips with the sanctions issue can consider Lloyd’s non-comprehensive list of aspects as a starting point. These include:

 

a. The geographical location of both the risks and the reinsurers that are asked to underwrite;

b. The nature, scope and complexity of business transactions the reinsurer and any of their stakeholders intend to engage in, as well as the nature, scope and complexity of cover of the reinsurance contracts concerned, which includes the class of business among others.

c. The corporate structure, identity, ownership and control (including operational structure) of the reinsured or other beneficiaries of cover that managing agents are asked to underwrite, as well as the corporate structure, identity, ownership and control (including operational structure) of the managing agent and the syndicate which participates in the risk concerned;

d. The likely activities, goods, equipment, service or trade covered;

e. The distribution channels through which the managing agent conducts business and the screening arrangements of the parties through whom the managing agent conducts business;

f. The method of acceptance of the reinsurance contract concerned and whether the managing agent participates as a lead or following underwriter on such contract; and

g. The sanction laws that apply to the managing agent, and the fact that these can result in civil and criminal liability or judgment.

Other factors such as strong / historical links between the reinsured and / or subject-matter of the reinsurance and certain countries or regions and / or the location of one of the parties (the broker) in a certain country or region should also be considered.

Managing agents should consider the fact that their assessment of their sanctions risk profile may vary across different business lines, underwriting disciplines and group companies.

They should also consider that arrangements introduced to managing agents through regulated entities may not have been analysed and screened so as to comply with sanctions. As such, managing agents should not rely on banks or payment service providers to perform due diligence or screening.