Cosco Group’s captive insurance company’s relationship with global reinsurance providers is set to be tested by the US decision to place two of its subsidiaries on a blacklist of companies failing to comply with sanctions on Iran.

Hull and machinery and war risk insurance for the giant Chinese state-owned shipping conglomerate is provided through its own captive Cosco Shipping Captive Insurance Co.

So marine insurance cover for its ships has not been immediately affected by the US decision on subsidiary Cosco Shipping Tanker (Dalian) Co and a similarly named affiliate.

Cosco Shipping Captive is strong enough to take on the whole group's cover. It has a financial strength rating of A (Excellent) from AM Best and capital reserves of $311m.

It earned $61m in premiums last year and has recorded an underwriting profit every year since it was set up in 2017.

Risk strategy

But its strategy is to place a large portion of its risk in the global reinsurance markets.

In a report on the company in September, AM Best said Cosco has a “high dependency” on the reinsurance markets.

It is understood that Cosco uses a panel to arrange its reinsurance cover, including US broker Lockton.

The cover is spread over a range of reinsurance companies. Markel’s US-based Lloyd’s syndicate is understood to be among the leading providers.

Amid increasing compliance sensitivity in the insurance world to sanctions, the US decision is bound to spark a review of cover to the Chinese company, sources suggested.

One option for the Cosco Group could be to move Cosco Dalian’s marine insurance cover out of the captive sector and into the wider Chinese insurance market.

However, that too could prove problematic.

The People’s Insurance Company of China (PICC) is the largest provider of marine insurance in the country but it too has strong links to the US.

AIG is among its largest shareholders with an 18% stake in the company.

Lockton and Markel did not respond to requests for comment at the time of writing.

P&I problems

There could be similar problems among Cosco Dalian’s protection and indemnity insurance providers.

Seven members of the International Group of P&I Clubs provide cover to Cosco Dalian and are in close discussion with US lawyers and authorities on which ships can be legitimately covered.

However, they are also considering the European Union's Blocking Regulation, which is intended to protect companies from being forced to accept US “secondary sanctions” as they are not recognised by EU member states.

While officially the P&I clubs are keeping quiet on the sanctions issue, privately they are dismissing claims that there is a widespread pullout of Cosco Group tonnage from the International Group into the China Shipowners Mutual Assurance Association (China P&I).

Relationships tested

But many International Group members already have a close relationship with China P&I, which could now be put under pressure by the sanctions decision.

China P&I buys into the International Group reinsurance through links with individual group members for claims of more than $400,000, and there is a similar agreement in place with PICC.

If some of the Cosco Dalian tonnage is to relocate to China P&I, then it might make it difficult for International Group members to continue to provide it reinsurance cover.

“The clubs could not differentiate between providing primary and reinsurance cover when it comes to the Cosco Dalian ships,” one legal source told TradeWinds.

“It would be impossible for International Group clubs to continue reinsurance arrangements with China P&I if the Cosco Dalian ships were placed there,” commented a broker.

One insurance broker suggested the only option for China P&I would be to place its reinsurance domestically.

China P&I could also find itself exposed to the widening US sanctions net. Its financial institution is Minsheng Bank, which is speculated to be one of three banks under investigation for breaching US sanctions against North Korea.