In this article, Laura González, deputy director of the Legal Department of MAPFRE Global Risks, looks at international sanctions and their impact on the (re)insurance sector.
Causes and effects of international sanctions
When we talk about international sanctions, countries like Cuba, Iran, and Venezuela almost immediately come to mind, followed quickly by the sanctions imposed by the European Union or the United States, which are frequently discussed in the international press. Without a doubt, we are witnessing an interesting yet complex scenario that comprises a vast network of political, commercial, and economic relationships affecting countries’ governments, social and political groups, institutions, people, and companies.
Sanctions have come to replace the traditional way of resolving conflicts through warfare. The first institution to adopt them was the United Nations Security Council in an effort to maintain or restore international peace and security. In this sense, all UN Member States are required to comply with sanctions. For its part, the European Union, within the framework of the so-called Common Foreign and Security Policy (CFSP), also allows for the application of sanctions, both as autonomous EU policy and when implementing UN Security Council resolutions.
“The first institution to adopt them was the United Nations Security Council in an effort to maintain or restore international peace and security.”
Like the UN and the EU, governments can also act autonomously and independently to apply restrictive measures on other governments. The most well-known example of this is the US, but it is not the only one. Countries like Canada and the United Kingdom are known for having implemented sanctions.
While their effectiveness is sometimes unclear, what is certain is that they can seriously restrict the economic capacity of the sanctioned country. In this sense, because these measures can bring serious trouble to a country and its population, it matters little that some question whether these legal instruments are effective in maintaining international peace and security or whether they further contribute to the proliferation or aggravation of situations of conflict.
What is certain, however, is that the geopolitical context in which we operate—where a myriad of governments and bodies impose sanctions and adopt a diverse range of measures—forges an ever-changing global sanctions framework that generates immense legal uncertainty in international trade and investment and affects the insurance and reinsurance sector at the global level.
Despite the variety of cases, generally speaking, sanctions can be classified into import and export restrictions. They can range from a ban on the supply of goods and services, oil, telecommunications equipment, etc., to a ban on the import of key resources that are essential to the sanctioned country’s activity. Governments can also sanction others by freezing funds or even by prohibiting their citizens from investing in the sanctioned country, thus putting pressure on individuals or business groups to change their trade policy with that country.
International sanctions in the (re)insurance sector
In particular, in the major risks insurance and reinsurance business, it is common to see sanctions of an “institutional” nature, which are directed against senior members of the government, the legislature and the judiciary, or others of an “economic or commercial” nature, which are imposed on companies that operate in different sectors (e.g. the land and sea transport sector, oil companies, infrastructure construction companies, etc.)
The United States is an expert in designing and implementing this type of sanction, and everyone in the insurance and reinsurance industry is acutely aware of its ability to produce severe economic effects on sanctioned countries and, above all, its ability to affect the commercial transactions of all concerned economic players.
The mainly economic sanctions brought forward by the United States impose primary sanctions on its own citizens, US Persons, and secondary sanctions on natural and legal persons of third-party governments who are non-US Persons. Secondary sanctions are designed to force companies and individuals from third-party governments that have not placed sanctions on a country—or have not placed the same sanctions as the US—to choose between doing business with the US or with the sanctioned country. In the latter case, the US would then extend the corresponding sanctions to the non-compliant countries. Consequently, a non-US reinsurance company may be sanctioned for providing reinsurance coverage to an entity or company in a sanctioned country. This system means that non-US companies will no longer maintain a relationship with the country under restrictions, as is currently happening with oil companies like Petróleos de Venezuela (PdVSA) or the Iranian energy, maritime, and aviation sectors.
“The United States is an expert designing and implementing this type of sanction, and everyone in the insurance and reinsurance industry is acutely aware of its ability to produce severe economic effects on sanctioned countries”
All international sanctions have a clear extraterritorial effect, as they apply to a foreign country. In this sense, it could be considered excessive for a government to try to manipulate the behavior of economic operators that are not subject to its jurisdiction and to take action on contracts, investments, or other operations that do not involve persons, goods, or actions sufficiently related to it or its citizens. From this perspective, secondary sanctions imposed by the US would have an extraterritorial effect considered unacceptable by the EU.
Nevertheless, as we have said before, prudence in the insurance of goods and services is a must, and all insurance and reinsurance companies worldwide protect themselves against the risk of sanctions. In general, and as a first step, companies usually adopt control procedures as part of a sanctions compliance program in order to exercise the proper due diligence when selecting and underwriting their risks. They also seek the help of specialized consultants who can alert them to any circumstance that may expose them to an international sanction in relation to their client portfolio. Furthermore, they protect themselves by adding coverage slips and notes to the traditional sanction limitation and exclusion clauses in direct insurance policies. These clauses exclude insurance or reinsurance coverage if the corresponding compensation payment may potentially expose the insurer or reinsurer to an international sanction when the policyholder, insured party, or beneficiary is included on a list of sanctions.
With respect to these clauses, in recent times we have witnessed opposition from regulators in some countries that either limit or restrict the option to exclude (re)insurance coverage due to potential US sanctions—as is the case with Germany. Other countries, like Argentina and Brazil, have taken even more restrictive reactions by prohibiting their use in direct insurance or reinsurance policies.
Brazil and Argentina have sought to limit the scope of secondary sanctions to prevent the United States from being able to regulate the international transactions of their subjects or citizens, since they consider, by virtue of the principle of sovereignty, that only they have the legitimacy to regulate the limitations or restrictions of their companies on certain sectors of activity.
The prohibition of penalty exclusion clauses can be problematic for reinsurance markets, as these require that such clauses be added to their reinsurance slips or certificates. Any change in local legislation must be scrutinized by the reinsurance market so as not to create gaps between direct insurance and reinsurance coverage. In addition, the myriad of clauses may result in situations of cancellation or early termination of contracts not subject to reinsurance coverage due to the local jurisdiction.
The prohibition of penalty exclusion clauses can be problematic for reinsurance markets, as these require that such clauses be added to their reinsurance slips or certificates.”
In short, the legality of secondary sanctions or other restrictive measures is being called into question, as these kinds of penalties can cause severe damage to a country’s economy and population and can also bring about consequences in the constantly evolving insurance and reinsurance environment.
Laura González Hernández, Deputy Manager of the MAPFRE GLOBAL RISKS legal department.
Laura holds a bachelor’s degree in law from the Complutense University of Madrid and a master’s degree in personal insurance from MAPFRE CUMES.
She joined MAPFRE CAJA SALUD in 2001 and moved to the Spanish Insurance Division in 2007, where she took on a number of a different responsibilities.
In 2013, she became the head of the legal department for the general advisory subdivision of MAPFRE ESPAÑA legal services. That same year, she took on the role of head of healthcare business development for MAPFRE ESPAÑA.
In June 2015, she joined MAPFRE GLOBAL RISKS as the head of the legal department, a position she held until July 2019.